Chinese Firms Skip Over US Tariffs by Setting Up Shop in Mexico

Chinese manufacturers looking to sidestep US tariffs and shorten pandemic-ravaged supply chains have found the perfect solution: Mexico.

Plants and warehouses are sprouting up south of the border as companies take advantage to proximity to the world’s biggest consumer market.

“If you want to do good business with America, you must have something close to the market,” says Simon Huang, country manager for Kuka Home, a Chinese furniture manufacturer with operations at Hofusan Industrial Park that’s located in a prime spot between Mexico’s industrial capital and the US border.

• To read today’s Big Take on Chinese manufacturers in Mexico, click here

That isn’t Mexico’s only selling point. Thanks to the country’s free-trade pact with the US and Canada, a chair made at Kuka’s factory in Hofusan can travel across the border duty-free, whereas one shipped to the US from China would be hit with a 25% tariff, according to Huang.

Chinese investment in Mexico jumped from $154 million in 2016 to $271 million the following year, when Donald Trump took office threatening a trade war. The pandemic’s supply-chain snarls and the angst caused by Chinese President Xi Jinping’s tech crackdown have catapulted yet more Chinese companies across the Pacific, with investment in Mexico hitting just under $500 million last year.

Chinese companies aren’t the first to seek shelter from US tariffs in Mexico. Japanese automakers began opening plants in the country in the 1990s in response to a barrage of import restrictions that began under Ronald Reagan.

Firms from China have faced some operational challenges in Mexico. The US-Mexico-Canada Agreement, which replaced Nafta, requires that a higher proportion of the value of any good must come from North America to qualify for tariff-free treatment. But Mexico doesn’t boast extensive networks of suppliers across a large number of industries, making it trickier to source materials.

Some of the new arrivals have other issues to contend with. Huang of Kuka Home says his Mexican workers are more inquisitive than those at home. “Mexican people always ask why—‘Why should I do this?’ ‘Why should I do that?’” Huang says. “They want to understand the reason.” Another difference: Workers in Mexico generally won’t clock 16-hour days, like employees in China are willing to do.

Read More:

• Mexico Tones Down Trade Rhetoric With US on Nearshoring Prospect
• US and Mexico Express Optimism on Resolving Energy Dispute
• US Factory Boom Heats Up as CEOs Yank Production Out of China
• Mexico Readies New Infrastructure Plan to Jump-Start Economy

— Max de Haldevang in Mexico City

Charted Territory

Race to Finish | US railroads and unions have until Friday to resolve a labor dispute that risks a crippling shutdown of the nation’s freight-rail network, wreaking havoc on the US economy. The two major unions still working to reach a deal cover some 57,000 workers. In the event of a strike, the 75% of newly built autos that move by rail would be stranded at their factories. So would be tens of thousands of carloads that carry everything from wheat bound for bakeries to plastic pellets used in soda bottles. The White House is considering the use of emergency powers to ensure critical material — such as chlorine for wastewater treatment plants — can be delivered in the event of a strike in order to avoid devastating disruptions to services. Amtrak is expanding service cancellations and the railroads are poised to stop shipments of farm products and other key goods starting Thursday.

Today’s Must Reads

• Selling to China | Tesla Chair Robyn Denholm has defended the US electric carmaker’s focus on China and plans to expand further there, saying reaching a goal of making 20 million vehicles a year by 2030 will require manufacturing capabilities on every continent.
• Storm update | Typhoon Muifa barreled toward Shanghai, threatening to bring strong winds and flooding to the heavily populated region along China’s eastern coast.
• Strike wave | Two of Britain’s largest ports are bracing for overlapping dockworker walkouts in coming weeks, threatening more disruption to the nation’s trade flows in a dispute over pay.
• Retail surprise | Inditex, the world’s biggest fast-fashion retailer, reported first-half results that topped estimates as the owner of the Zara clothing brand defied a global surge in inflation. It also built up inventory to cushion against supply-chain snarls.
• Xi returns | In the almost 1,000 days since Xi Jinping last ventured abroad, China has found itself increasingly isolated within the US-led world order. He’s finally reemerging this week alongside Russia’s Vladimir Putin to showcase his vision for a viable alternative.
• Rationing nears | European Commission President Ursula von der Leyen will call for radical steps to stem the energy crisis, edging closer to rationing measures and calling for a swoop on energy companies’ profits.

On the Bloomberg Terminal

• Risk alert | Rising rates and recessionary fears are growing, yet credit across continents and sectors may be well positioned for additional supply and demand headwinds, Bloomberg Intelligence says in the FICC Focus Podcast.
• ITC ban | The US International Trade Commission issued an order blocking imports of a Chinese company’s clinical-grade, genetically engineered rice seeds for medical uses after finding they infringe a patent held by Kansas developer Ventria Bioscience, Bloomberg Law reports.
• Use the AHOY function to track global commodities trade flows.
• Click HERE for automated stories about supply chains.
• See BNEF for BloombergNEF’s analysis of clean energy, advanced transport, digital industry, innovative materials, and commodities.
• Click VRUS on the terminal for news and data on the coronavirus and here for maps and charts.