U.S.-China Trade War Might Benefit the U.S.-Mexico Border Region

Category: News
Published: 2019-02-01

U.S. tariffs are encouraging companies to move some production out of China. Some companies are moving to other Asian countries, but the ones that already have manufacturing sites in northern Mexico as well as in the southern U.S. are planning to relocate to this region or grow their operations here, according to companies’ announcements.

This trade war has made more expensive over US$250-billion Chinese worth of exports for the U.S. market, from small home appliances to electronics and even automobiles. The disruption to the world’s biggest trading relationship has manufacturers working on shifting some of their assembly lines.

One of the companies willing to move production to Mexico and other countries is Pegatron Corporation, said the company’s CEO S.J. Liao during an investors teleconference.

Pegatron could turn the maintenance and repair facilities in the U.S. and Mexico into assembly lines in the short term. In Mexico, Pegatron has a facility in Ciudad Juarez.

Although reallocating production capacity and moving equipment between the company’s locations would not require substantial capital expenditure, the change would push up management costs, Liao added.

Recently, Japanese motor supplier Nidec informed that it would move some production out of China.

The company plans to transfer production of power-steering motors for cars, in addition to components for household air conditioners to Mexico, investing US$178 million to double its capacity in the country by next March.

These products are subject to 25% tariffs imposed by the U.S. President Donald Trump’s administration.

Nidec currently has production sites in Ciudad Juárez, Reynosa, Apodaca, and San Luis Potosí. It also has a Research & Development (R&D) unit at the Juárez facility, according to its website.

Chinese components are heavily used in the U.S. auto industry, and Nidec believes that supplying automakers from Mexico will help it to gain orders from rivals that continue to produce in China.

Also, the Nikkei Asian Review reported Wistron aims to boost its production capacity outside of China, including the U.S., Mexico, Czech Republic, Malaysia, and India, and plans to reopen a production facility in the Philippines.

In Mexico, Wistron has a manufacturing site in Ciudad Juarez and a service center in Mexico City. In the U.S., the company has a manufacturing site, an R&D facility and a service center, according to its website.

The tariffs imposed by the Trump administration, rolled out in phases from July to September, target a total of US$250 billion worth of Chinese exports to the U.S., including car audio products, electric motors for auto industry and machinery components. 

Although the U.S. government has a program that exempts some products from full-blown tariffs, it has not been used yet.

According to Chinese statistics, the country’s exports to the U.S. surged in September ahead of the latest additional tariffs. Nevertheless, the figure will likely fall after the last-minute rush as businesses shift production away from China.

But the trade war is just one factor to move production out of China. Cost in China has been rising and some companies are analyzing increasing their North America operations.

“With recent tariff battles, companies aren’t as eager to have production in China,” said to Forbes Nathan Resnick, CEO of startup company Sourcify. “We run production runs in India, Bangladesh, Vietnam, Philippines and Mexico right now. Labor costs are actually more affordable outside of China, so for products like apparel where there is a lot of cut-and-sew labor, most companies are moving out of China anyway.”

Pegatron’s CEO agrees. Liao said during the teleconference the entire supply chain is being challenged by labor shortages and rising wages in China, while diversification would also help push down the cost and difficulty of gathering the required workforce during peak seasons.

The Boston Consulting Group Global Manufacturing Cost Competitive Index shows that Mexico’s manufacturing cost advantage over the U.S., China, and other global manufacturing destinations is wide. This is being driven by low labor and energy costs. 

“We see Mexico, unlike low-cost destinations in Asia, as an asset to U.S. manufacturing competitiveness, because products built in that coun – try tend to contain high-value, U.S.-made components and assemblies. Mexican assembly plants, therefore, help preserve U.S. manufacturing jobs,” the BCG analysis reads.

Furthermore, some companies with operations in China and Mexico said the overall cost of operations is up to 14% cheaper in Mexico than in Asia. 

An Ongoing Relationship

Asian companies trust border cities such as Tijuana, Mexicali, Juárez, Reynosa, and Matamoros to establish their Mexican operations. In the last five years, corporations from Asia have invested in expansions in this region, while others started new operations.

The components manufactured by these companies include cellpho – nes, HD screens, automobiles, optic fiber cables, auto parts, computers, tailored packaging, appliances, and air conditioners.

The Foreign Direct Investment (FDI) from Asia mainly comes from Japan, but other countries such as China, Korea, Taiwan, Singapore, and Honk Kong are also important. 

Furthermore, Asian countries contribute from 7% to 12% of the FDI in Baja California, Sonora, Coahuila, Chihuahua, Nuevo Leon, and Tamaulipas, data from the Ministry of Economy (SE) shows. In 2017, investment from these companies was around US$780 million.

Some Asian giants such as Foxconn, Kia Motors, Samsung, Toyota, LG, Wistron, Furukawa, and Hisense have manufacturing sites in this northern region of Mexico. In 2016, Kia Motors invested US$1 billion in a new assembly plant in Pesqueria, Nuevo Leon. This has been the highest investment in the region in the last five years. 

This Kia assembly plant was an economic trigger for some com – munities in Nuevo Leon and Coahuila. Both states attracted at least 30 companies, mostly Tier 1 and Tier 2 firms, from Korea and Japan. The FDI in these two states increased in 2016 and 2017 driven by these new Asian corporations.

Trade Missions to Asia

U.S.-Mexico border cities have been conducting trade missions to Asia. Last year, officials from the State Governments from Baja California, Chihuahua, Sonora, Coahuila, Tamaulipas, and Nuevo Leon had trade missions to Asia and met with executives trying to convince them to open new operations in their territories, while offering several local incentives. 

Recently, the officials from the McAllen Economic Development Corporation visited Japan and South Korea. McAllen EDC President Keith Patridge said there was great interest shown by Asian companies in locating their manufacturing operations in both McAllen and Reynosa.

He expressed that many manufacturing companies want to pull their operations out of China, with Vietnam, Mexico and the U.S. as the pre – ferred destinations.