ANALYSISAPRIL 2024
Prepared by
Alfredo Coutino
Alfredo.Coutino@moodys.com
Director

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MOODY’S ANALYTICS

Nearshoring and Potential Trade
Triangulation
The proliferation of more restrictive tariff policies along with emerging
geopolitical events is producing a reconfiguration of global supply
chains with the relocation of plants and investments to countries withgeographical advantages and more market-friendly environments. This
relocation process, called nearshoring or friendshoring, is happening
already in North America and is greatly benefiting the area thanks tothe advantages provided by the trilateral trade agreement among theU.S., Mexico and Canada. Mexico is becoming the main destination ofnearshoring in North America.
Nearshoring is certainly producing benefits, but it is also generating
inconveniences, as it attracts producers from other regions to Mexico withthe purpose of accessing the U.S. market—particularly Asian producers
subject to higher U.S. tariffs and restrictions. This is triggering concerns
in the U.S. about the possibility of triangulation of China’s imports to the
U.S. via Mexico. By analyzing data on the volume of Mexico’s imports from
China and Mexico’s exports of manufacturing products to the U.S., we cangain some insight about this potential trade triangulation. Our examination
does not rule out the possibility that some products exported to the U.S.
from Mexico are being generated outside Mexico.

Nearshoring and Potential Trade Triangulation

1

Nearshoring and Potential Trade
Triangulation
BY ALFREDO COUTINO

T

he proliferation of more restrictive tariff policies along with emerging geopolitical events is producing
a reconfiguration of global supply chains with the relocation of plants and investments to countries
with geographical advantages and more market-friendly environments. This relocation process, callednearshoring or friendshoring, is happening already in North America and is greatly benefiting the area thanks
to the advantages provided by the trilateral trade agreement among the U.S., Mexico and Canada. Mexico
is becoming the main destination of nearshoring in North America.
Nearshoring is certainly producing benefits, but it is also generating inconveniences, as it attracts producers
from other regions to Mexico with the purpose of accessing the U.S. market—particularly Asian producers
subject to higher U.S. tariffs and restrictions. This is triggering concerns in the U.S. about the possibilityof triangulation of China’s imports to the U.S. via Mexico. By analyzing data on the volume of Mexico’s
imports from China and Mexico’s exports of manufacturing products to the U.S., we can gain some insightabout this potential trade triangulation. Our examination does not rule out the possibility that some products
exported to the U.S. from Mexico are being generated outside Mexico.

Overview
Mexico has strengthened its trade and investment links with the U.S. thanks to the privileged status
granted by the North American Free Trade Agreement since 1994. More recently, the country has been
benefiting not only as a result of the U.S. tariff policy implemented against China but also because of theongoing relocation of global supply chains, a phenomenon fueled by the pandemic and geopolitical events.
Mexico recently displaced China as the main trade provider to the U.S. market. However, Mexico has notbeen exempted from trade frictions, as lately the U.S. does not perceive Mexico’s friendly neighbor status
as strong.
In the three-decade life of the trilateral trade agreement that involves Mexico, the U.S. and Canada, thevalue of Mexican exports has increased by more than tenfold, and Mexico’s trade balance with the U.S. has
improved significantly, from a deficit of $2.4 billion in 1993 to a stratospheric surplus of $234.7 billion in
2023. U.S. direct investment pouring into Mexico has multiplied from $3.5 billion in 1993 to $20 billion in
2023; this is not only in terms of new investments but also reinvestments, an indication of the degree ofU.S. corporations’ confidence in Mexico (see Chart 1).
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Nearshoring and Potential Trade Triangulation2

Chart 1: Mexico Trade Balance With the U.S.
$ bil, NSA
250
200
150
100
50
0
-50

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Sources: Central Bank of Mexico, Moody’s Analytics
Moody’s Analytics

Presentation Title, Month 2022

1

However, with the arrival of U.S. President Donald Trump to office in 2017 and as a result of his policy ofbringing jobs back to the U.S., the trilateral trade agreement faced headwinds, and China’s exports to the
U.S. were penalized with higher tariffs. Fortunately, the trilateral agreement was renegotiated, and theUnited States-Mexico-Canada Agreement entered into force in mid-2020. Mexico’s trade with the U.S. did
not suffer during the negotiation period as the country’s surplus with its northern neighbor continued toswell. Since 2021, trade tariffs on China have been ratified and extended under U.S. President Joe Biden.
As a result, China lost its status as the main trade partner for goods to the U.S. market. The proportion ofChinese imports to the U.S. fell significantly in the past two years from almost 19% at the start of 2022
to only 13.5% at the end of 2023.1 Meanwhile, U.S. imports from Mexico gained space and increased toaround 16% at the end of 2023 from 13.5% at the start of 2022, making Mexico the main provider of products
to the U.S. market and pushing China to second place at the end of 2022. Canada then pushed China to
third place in the last quarter of 2023 (see Chart 2).
Mexico has become a net beneficiary of the U.S. tariff policy toward China, as indicated by its market gainin the past few years. It also benefited from the prolonged disruption in supply chains caused by the pandemic response, which forced U.S. companies to find closer and more reliable providers. Mexico, being partof the three-decade-long trilateral trade agreement, fully qualified to benefit from the relocation of some
U.S. plants and investments. Also, given Mexico’s geographical closeness to the largest market in the world,
the country also attracted plants and investments from China and other Asian countries. As a result, foreign
direct investment into Mexico accelerated after the pandemic, and prospects continue to improve as othercorporations express interest in investing in Mexico.
Nearshoring is also introducing some inconveniences to U.S.-Mexico trade relations. Some Asian companies
are interested in moving to or expanding their production plants in Mexico to take advantage of the USMCA
trilateral trade agreement by complying with the agreement’s regional content requirements and consequently accessing the U.S. market under preferential tariffs. Bilateral trade frictions have always existed,
1 Bureau of Economic Analysis. “U.S. International Trade in Goods”
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Chart 2: U.S. Main Import Providers% of total U.S. imports of goods, SA
20
18
16
14
12
10
8
6
4
2
0

22Q1

22Q2

22Q3

22Q4
China

Mexico

23Q1

23Q2

23Q3

23Q4

CanadaSources: Bureau of Economic Analysis, Moody’s Analytics
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Presentation Title, Month 2022

2

but they have increased in the past few years mainly as a result of measures taken by Mexico’s government
to limit private competition in key sectors of the economy such as oil and electricity, which adversely
affect some U.S. firms and Canadian investors. These issues could limit the benefits of nearshoring in thelonger term.
Meanwhile, nearshoring is a reality for Mexico; however, to take full advantage of this process, Mexico must
improve the business climate and provide the infrastructure required by global players.

Nearshoring: The positives and negatives
Benefits
Nearshoring can be defined as the process of relocating production plants and investments from one country
or region to another one closer to an important market with the purposes of ensuring the supply of inputs
and products and reducing production costs. Nearshoring is usually accompanied by friendshoring, a relocation process that includes the selection of a place that provides a friendly environment for doing businessand a political democracy that respects property rights.
The arrival of investments and plants to Mexico is essentially a nearshoring process triggered by three factors.
First, the proliferation of protectionist policies has sought to shield local producers from unfair trade practices
through the imposition of import tariffs. Second, the disruption in supply chains introduced by the COVID-19
pandemic contributed to an extended paralysis in production and distribution processes given the shutdownof international borders and transportation. Third, geopolitical events (including the Russia-Ukraine war andChina-Taiwan frictions) added disruptions in the supply and distribution of commodities and manufacturing inputs. Production and consumption markets were forced to seek closer providers to reduce the risk oflogistics disruption.
The benefits of nearshoring are diverse for both the promoter and the receiver of the relocation. It strengthens
the trade partnership and integration of supply chains, increases the flow of investment and trade, stimulates
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the transfer of technology and consequently productivity, and promotes economic growth and labor. In
the case of U.S.-Mexico nearshoring, both countries greatly benefit. U.S. corporations relocate to Mexico
production plants that have operated overseas and mainly in China to ensure the supply of inputs from avery close partner just across the border, improving logistics and reducing costs. On the other side, Mexico
receives increasing flows of direct investments, new technology, the possibility to create more and better-paid
employment, and increased trade with its main trading partner and the largest market in the world.
In 2023 the flow of foreign direct investment into Mexico increased about 30% from the year before,
discounting the merger and acquisition of two corporations operating in Mexico. Certainly, the U.S. is thelargest contributor of FDI to Mexico. This was particularly the case in 2023, when the U.S. represented
around 45% of Mexico’s total FDI. Looking at the amount of FDI in 2023, one cannot find direct evidence ofthe contribution provided by nearshoring in terms of new investments coming from abroad. This is because
an important part of the FDI associated with nearshoring is recorded as reinvestments made by foreign
corporations already operating in Mexico, which implies that those firms are using profits to expand theirplants and capacity in the country. Thus, while reinvestments represented only 40% of total FDI in 2021,
they increased their participation to 74% in 2023.
A number of announcements by foreign companies regarding their plans to invest in Mexico confirm thereality of this nearshoring trend. Mexico’s Ministry of Finance estimates that such announcements accounted
for around $74 billion of FDI through October 2023,2 including investments in energy, railroads, and transportation and communication. An update from announcements made through the first three months of2024 accounts for another $31.5 billion.3 The automotive sector is a key player in expressions of interest to
expand in Mexico by companies such as Tesla, BMW, Ford and GM along with Asian manufacturers including
BYD and KIA.
The main trade-off for Mexico is that it must commit to creating and improving the infrastructure requiredby these global players to ensure that the nearshoring and its benefits materialize. Improved roads, ports,
airports, and expanded basic infrastructure for water and electricity (particularly from renewable energy)
are needed as well as improved and expedited business processes.

Inconveniences
While Mexico reaps many benefits from nearshoring, the U.S. also sees gains mainly in terms of ensured
supplies of inputs and products from its next-door neighbor at cheaper costs of production and transportation. However, nearshoring is also attracting the relocation of non-U.S. plants and investments to Mexico,
particularly from countries facing nonpreferential treatment by the U.S. China and some other Asian countries
that face tariff restrictions from the U.S. view relocation to Mexico as a way to access the U.S. market under
the preferential treatment granted by the USMCA. This could be possible if a Chinese manufacturer relocates oropens a production plant in Mexican territory and complies with the established regional content requirements,
known as the rule of origin or ROO, in the trilateral agreement.
Asian automakers already exist in Mexico. However, the U.S. trade policy on tariffs for Chinese products
seems to be a factor accelerating the relocation of Chinese manufacturers to Mexico. An example of thisis China’s BYD, which began selling electric cars in Mexico in 2023 and announced intentions to build a manu2 Secretaría de Hacienda y Crédito Público “Comunicado No.68”
3 Secretaría de Economía “Comunicado de Prensa”, 15 de Marzo, 2024.
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facturing plant there, even though BYD has said it will focus only on the domestic market.4 Mexican media
also has reported about Tesla’s intentions to open a plant in the northern state of Nuevo Leon, with anestimated investment of $10 billion, and KIA’s expansion, which will account for $6 billion. Whether theseplants materialize or not, they are already being taken into account by Mexican authorities, particularly the
Ministry of Economics.
Meanwhile, on the U.S. side, there is increased demand to enforce the trade policy to protect domestic
producers and to investigate potential unfair trade practices in the auto and steel industries involving Mexico.
Regarding China’s threat to America’s auto industry via Mexico,5 the most recent example is the Alliance for
American Manufacturing raising the alarm over China’s plant expansions in Mexico and their access to the
U.S. market by taking advantage of more favorable tariffs under the USMCA. A second example is the U.S.
claim about a potential triangulation of steel and aluminum products via Mexico.6
Suspicions are increasing about Mexico being used as a back door to redirect Chinese imports into the U.S.
A recent press release from Xeneta, a platform specializing in ocean freight rate benchmarking and market
intelligence, reported a “massive increase in container shipping imports from China into Mexico,” 7 raisingsuspicion that some of those Chinese imports could end up in the U.S. as importers try to avoid U.S. tariffs.

Searching for signs of triangulation
Mexico’s imports from China have maintained a relatively stable proportion of around 19% of the total in
the past four years, though they doubled from $5.5 billion in 2016 to $10 billion in 2023. The expansion
began in 2021, when imports from China grew 37%. Growth moderated to 17% in 2022 and contracted 4%
in 2023. In terms of current-dollar value, the data do not show evidence of a steady Chinese import penetration in Mexico. There is a counterargument, however, that the data reflect the influence of prices. For
example, if import prices declined significantly, then the volume of Chinese imports could have increased.
The number of containers arriving in Mexico from China is an additional piece of information that supports
the argument of a massive arrival of Chinese imports into Mexico. According to Xeneta’s report, the numberof containers expanded at an annual rate of 60% in January 2024, growing from 73,000 units to 117,000
units. Certainly, there has been a significant expansion in the past two years, with the number of containers
increasing 3.5% in 2022 and 35% in 2023. Therefore, the analysis must focus on volume of trade, which isdefined as trade in constant prices, rather than on current-dollar value.
As a first attempt to search for more solid evidence, we perform a two-step data analysis about the volumeof imports from China to Mexico and the volume of Mexico’s exports of manufacturing products to the U.S.
This analysis will help us to gain some insights about the possibility of a triangulation of Chinese imports
into the U.S. that are wrapped as Mexican exports. The first step will allow us to determine if there are signsof a Chinese import penetration to Mexico in the past few years, and the second will help us to see thedegree of correlation between the volume of Mexico’s manufacturing exports to the U.S. and the country’s
manufacturing capacity and employment. If the volume of Mexico’s manufacturing exports has expanded
in an environment of unchanged capacity utilization and employment, that would be an indication that theextra volume exported comes from somewhere else. One source may be an improvement in productivity,
4
5
6
7Yahoo Finance, “BYD not planning to come to the U.S.”, February 27, 2024.
American Manufacturing Org. On a Collision Course.
USTR, Press Release, September 29, 2023.
Xeneta, Press Release, March 15, 2024.

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in this case defined as the increase in output using the same number of inputs. If that is the case, then data
should not show a decrease in employment. In other words, if employment has decreased and the use of
capacity remains the same, then someone is producing the extra volume exported to the U.S. The same
applies to the case of capacity utilization.

Has the volume of Chinese imports to Mexico expanded?
After plunging in the first half of 2020 because of the disruptions after the COVID-19 outbreak, thevolume of total imports from China recovered to the pre-pandemic level by the third quarter of 2021 andremained relatively stable in 2022. Since then, import volume from China has expanded. It grew 22% in thesecond quarter of 2023 and averaged around 20% annual growth for the last three quarters of the year. For
all of 2023, volume surged 14% over the 2022 level (see Chart 3), while the value of imports contracted
4%. A trend of increased Chinese imports appears to be extending into 2024 as indicated by the significant increase in the number of containers reported by Xeneta, and because the value of imports from China
expanded 12% annually in January amid a 1% decrease in the total value of Mexico’s imports. It is important toremark that most of Mexico’s imports from China are nonoil products, with manufacturing imports being
an important contributor.

Chart 3: Mexico’s Volume of Imports From China
2018$ bil, SA
30
25
20
15
10
5
0

19Q4 20Q1 20Q2 20Q3 20Q4 21Q1 21Q2 21Q3 21Q4 22Q1 22Q2 22Q3 22Q4 23Q1 23Q2 23Q3 23Q4

Sources: Central Bank of Mexico, Moody’s Analytics
Moody’s Analytics

Presentation Title, Month 2022

3

So far, the data show evidence that the volume of imports from China expanded in 2023, even though thevalue decreased as mentioned before. One explanation lies in the decrease of import prices resulting fromthe strength of the Mexican peso during the year. In this case, Mexico bought cheaper products from China
thanks to the strong peso. Another potential explanation could be that China sold its products at discounted
prices to Mexico. In this case, China wanted to gain a market in Mexico. The main conclusion here is that thevolume of imports from China has certainly expanded and increased its participation in Mexico’s total imports
by 1.5 percentage points from 2017 when U.S. President Trump took office. This could be explained as a deliberate Chinese policy to diversify its trade markets given the U.S. restrictions imposed on imports from China(see Chart 4).
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Chart 4: Mexico’s Volume of Imports From China% of total imports, SA
20

19

18

17

16

17

18

19

20

21

22

23

Sources: Central Bank of Mexico, Moody’s Analytics
Moody’s Analytics

Presentation Title, Month 2022

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Has the volume of Mexico’s manufacturing exports to the U.S. expanded?
The U.S. is the main market for Mexican exports with the neighboring country a destination for more than
80% of Mexico’s total sales abroad. Manufacturing exports represent almost 90% of Mexico’s total exports,
and manufacturing exports to the U.S. market represent 75% of total exports. This makes manufacturingexports the main channel for Mexico to increase its export penetration in the U.S. Thus, our focus is to see if
data indicate a gain in market participation for Mexico’s manufacturing exports to the U.S. In the past two
years, Mexico’s manufacturing exports gained 1.1 percentage points as a proportion of total exports, andmanufacturing exports to the U.S. gained 1.7 percentage points in the total. This is an indication that Mexico
has exported more volume of manufacturing products to the U.S. in the past two years (see Chart 5).

Chart 5: Mexico’s Volume of Exports of Goods% of total exports of goods, SA
90
80
70
60
50
40
30
20
10
0

21

22
Total manufacturing exports

23

Manufacturing exports to U.S.

Sources: Central Bank of Mexico, Moody’s Analytics
Moody’s Analytics

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If that extra volume of manufacturing exports is explained by more employment and increased capacity
utilization, then there is no doubt that Mexico has increased its domestic capacity to produce more exports.
By including employment in manufacturing production in the analysis, we see that jobs increased 2.4%
from the end of 2022 to the end of 2023. Thus, the industry has certainly occupied more workers in thepast year, which in principle could explain the increase in production and consequently in the volume of
products exported. Moreover, capacity utilization by manufacturers decreased 3% in the same period. This
raises two questions: Why are more workers now using less capacity? And, in the absence of an increase inproductivity, would not more workers use more capacity instead of less (see Chart 6)?

Chart 6: Exports, Employment and Capacity Utilization
Y-axes: 2018=100 (L), % of total capacity (R)
120

120
110

110

100

100

90

90

80
70

80

60

70

50

60
16Q1

17Q1

18Q1

Manufacturing exports

19Q1

20Q1

Manufacturing exports to U.S.

21Q1

22Q1

Manufacturing employment

23Q1

40

Capacity utilization

Sources: INEGI, Central Bank of Mexico, Moody’s Analytics
Moody’s Analytics

Presentation Title, Month 2022

6

The insights gained only leave the door open to the possibility that the increase in the volume of
manufacturing production, without utilizing more capacity, could be partly explained by products
generated outside of Mexico.

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About the Author
Alfredo Coutino is a director at Moody’s Analytics. Dr. Coutino is responsible for analysis, modeling and forecastingfor Latin America. Based in the King of Prussia PA office, he is in charge of real-time coverage of Latin America for
Economic View. He is a regular presenter at our annual Macroeconomic Outlook Conference. He has been a speaker at
United Nations conferences and at the American Economic Association and has published papers on applied econometrics
with Nobel laureate Lawrence Klein. Dr. Coutino received his PhD in economics from the University of Madrid after
completing doctoral studies at Temple University.

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