It is no surprise that we’re seeing China Manufacturing Moving to Mexico. Political rhetoric in the US lately is down on international trade and down on trade partners, China and Mexico. It comes as no surprise that these two manufacturing countries have been strengthening ties in recent months and even years. The two countries have much in common and stand to benefit greatly from one another.

A Burgeoning China-Mexico Partnership

China and Mexico seem to be proactively increasing economic and diplomatic ties lately, but the two countries are no strangers to one another. China is already Mexico’s second largest trading partner. China-Mexico relations have been cordial for many years, but there is a growing sense that the two countries have much in common. For example, Mexico needs infrastructure for their newly opened energy sector, while China needs to source cheap energy soon. Talks between the two have increased in recent months. Additionally, Chinese firms are eager for opportunities to gain closer proximity to the US consumer market, and Mexico – already thoroughly integrated with the US economy – needs more capital and inputs.

Chinese companies like Hisense Co. are expanding their Mexican holdings or opening new facilities in the Latin American manufacturing country. The situation is ripe for a harmonious partnership, as Mexico expands its international relations and China positions itself closer to the US.

China Manufacturing Moving to Mexico

China-Mexico relations make sense for many reasons. Timing is one of those reasons. China’s manufacturing boom is currently slowing down, yet Mexico’s is only beginning. Other incentives for Chinese business include:

• Mexico has made great strides in recent years, reforming transportation, energy, commercial and labor laws, as well as safety.
• Mexico provides China access to countries around the world with over 40 trade deals in place – most notably with the US.
• China stands to benefit from Mexico’s uniquely integrated partnership with US producers. Mexico’s business ties to the US become China’s as more Chinese companies develop ties with Mexican manufacturing.
• Productivity is rising in Mexico, while wages remain stationary. This provides immense benefit to companies from China where wages continue to rise against productivity.

The strengthening of China-Mexico relations makes sense for both countries at this time on the world front. If the US minimizes trade with trade partners like Mexico and China, a stronger China-Mexico partnership will help both countries through the downturn. If US trade policy remains on its current course, Mexico will become even more productive with Chinese investment, and China will become more profitable with lower labor costs and better access to US markets.

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EU-US Free Trade Agreement talks are underway between the United States and the European Union to improve US-EU free trade. Meanwhile, many in the US are concerned continued trade with Mexico might suffer in the next few years. While current political rhetoric leads some to question whether NAFTA might be scrapped or tariffs with Mexico raised to 35%, it is insightful to see the level of consistency in the terms found in NAFTA and in the developing Transatlantic Trade and Investment Partnership (TTIP) with the EU.

US Trade with the EU

EU-US Free Trade Agreement has been preferential for many years, and the developing TTIP agreement will only enhance this. The two economies already have trade agreements in place providing very low tariff rates of typically less than 3%. The US and EU partner in many ways along the value chain of global manufacturing. In fact, the US typically invests three times as much in the EU as in Asia. Likewise, the EU typically invests eight times as much in the US as in China and India combined. The two economies are highly integrated, and nearly a third of all world trade flows are the result of US-EU free trade.

The TTIP Explained

There is currently an agreement being negotiated to stimulate US-EU free trade even further. The deal is called the Transatlantic Trade and Investment Partnership or TTIP. Among the goals of the TTIP are:

• To promote trade between the two economic giants and multilateral economic growth
• To reduce or eliminate import/export duties between the two economies

As with NAFTA, which the US agreed to with Canada and Mexico in the early 1990s, the TTIP will allow goods to be exchanged with virtually 0% tariffs and minimal regulatory obstacles. By some estimates, the EU will enjoy benefits of approximately €120 billion and the US of approximately €90 billion thanks to the agreement. Globally, the deal will bring benefits of at least another €100 billion.

EU-US Free Trade Agreement

These arrangements with US trade partners in Europe are no anomaly. The EU-US Free Trade Agreement relationship of highly integrated cooperation and reduced or eliminated tariffs can also be found in other US trade agreements, such as the North American Free Trade Agreement (NAFTA) with Canada and Mexico.

Speculations of abandoning NAFTA and even raising tariffs with Mexico to 35% notwithstanding, the attitude towards trade partners in Europe has been consistent with the US policy towards Canada and Mexico. In many ways, the integrated partnership between the US and the EU reflects the US partnership with fellow NAFTA signatories, Canada and Mexico. What the US does for one, it will most likely do for the other. Because we see such friendly US-EU free trade practices, we will most likely continue to see friendly trade practices between the United States all of its trade partners – including Mexico.

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China has long been the offshoring destination of US companies seeking to reduce costs. However, as China’s labor costs and freight costs rise, many are coming back home to North America in search of better alternatives. Many manufacturers leaving China  are finding Mexico to be that better alternative.

Motivations for Manufacturers Leaving China

There are many motivating factors driving US manufacturers to choose Mexico over China. A few such motivations include:

• Currency Concerns: Chinese currency fluctuations have been a growing concern in determining profit margins for many US companies. Conversely, Mexico’s peso has remained relatively stable.
• Freight Costs: In recent years, the price of oil has shifted dramatically. Oil prices are now typically over $50 a barrel, and shipping freight back and forth across the Pacific is no longer an economically sound, long-term strategy for many US manufacturers.
• Proximity: Manufacturers leaving China find producing in Mexico allows quick access to US consumer markets. Often, goods can be in US stores within days.
• Labor Productivity: Chinese labor productivity is on the rise, but the Boston Consulting Group predicts the cost of labor is rising faster. Meanwhile, Mexican productivity remains high while labor costs are just as low as, or lower than, labor costs in China.
• Duties: Because of NAFTA, manufacturers leaving China for Mexico enjoy virtually no duties in exporting to and importing from the US.

China No Longer the Darling

For many years, China was the darling of US manufacturers seeking lower labor costs. Since their inclusion in the World Trade Organization, China was seen as the offshoring partner of choice. Extremely low wages easily offset the freight costs of shipping across the Pacific – and shipping costs were lower then, due to cheap oil. But that is all changing. In recent years, oil prices have risen. China’s wages have rapidly increased, as well, and will continue to do so. China continues to offer benefits for many companies, but it is no longer the darling of US producers. Many manufacturers leaving China have decided it is more worthwhile to reshore operations back to North America.

According to one recent study, “Footprint 2020: Expansion and Optimization Approaches for U.S. Manufacturers,” more manufacturers leaving China are establishing facilities in Mexico than in the US for the reasons listed above. US wages are relatively too high for many of these companies, but Mexico offers the right balance of skilled labor, low costs, and productivity – all while lying just south of the US border.

Mexico is vying to cement their status as North America’s manufacturing hub, and sweeping changes are underway to ensure a strong economic future for the Latin American country. Mexican infrastructure improvements are already increasing international investment, and a new plan is underway to expand the country’s capacity and growth in coming years.

Mexican Infrastructure Improvements Take Center Stage

Sweeping reforms characterized the incoming president, Enrique Peña Nieto, when his administration made reforms in nearly every public sector the top priority for the manufacturing country. Economic growth was paramount, and the country made great strides in many areas to improve Mexico’s economic capability, including:

• Overhauled labor laws
• Tightened intellectual property laws
• Partially privatized energy sector
• Improved border security

Among the most dramatic of reforms was the introduction of the National Infrastructure Program 2014-2018, in 2014, which identifies approximately 750 specific projects and prescribes approximately $600 billion USD – about 8% of GDP – to accomplish them. The funds are coming from both public and private sources, and will focus primarily on energy, transportation, and communications infrastructure. Among the many projects currently underway are:

• New ports
• Expanding existing ports
• Paving more roads
• Extending railways
• Expanding electricity generation capacity

Mexican Infrastructure Improvements by Sector

World demand for goods manufactured in Mexico threaten to outpace capacity, but Mexico is rallying significant investment for overhauling major economic sectors, particularly in the energy and transportation fields. Total value of the infrastructure construction market reached approximately $50 billion USD in 2015, and is expected to reach approximately $60 billion USD by 2020. Overall, the investment into these infrastructure improvements is expected to ultimately reach $600 billion USD.

Some of the specific infrastructure improvements on the agenda for each sector include:

Energy:

• Extend and develop infrastructure for exploring and extracting hydrocarbons.
• Encourage the development of fuel transportation and storage projects.
• Promote the development of domestic petrochemicals.
• Expand quality electricity distribution, reducing supply losses and increasing service coverage.

Water:

• Increase supply of drinking water and drainage capacity.
• Build flood-protection infrastructure.

Communications and Transportation:

• Develop multimodal transport infrastructure to generate competitive costs, value, improved security, and economic and social development.
• Modernize passenger mobility in comprehensive, safe, agile, and sustainable ways.
• Provide better communications access and service coverage to the public.

Health:

• Establish inter-institutional health resource planning and management.
• Consolidate health infrastructure, prioritizing vulnerable-population areas.

For a week now, the TECMA Tijuana Group’s facilities have been converted into a gift factory, churning out wrapped gifts for more than 18,000 of Ciudad Tijuana’s poorest children. Employees and volunteers are wrapping toys as part of an annual “Toy Movement” project sponsored by Tecma and Spin Master Toys of Canada to provide a merry Christmas for area children. The Spin Master toys will be distributed on December 14 among children at area schools, hospitals, and charities.

“The toys will be gifted to children of poor resources who live in marginalized areas of the city,” according to Reynaldo Serrano, Operations Manager of the Tecma plant located on Pacifico Boulevard. “The goal is to bring Christmas to 18,000 children living in areas of conflict or marginalized conditions.”

Reynaldo went on to describe the prevalence of Christmas spirit among the staff members and employees at Tecma who have donated wrapping materials and in-kind contributions needed as part of the great logistical challenge of moving, sorting, wrapping and distributing 18,000 toys in a very short time span. The operation is a great way to kindle solidarity and teambuilding among all those involved, and Tecma employees have also included their families and friends in the wrapping project. This is truly a family-oriented community event.

Dozens of young high school students belonging to CECyTE Santa Fe and CBTis 156 were also involved in wrapping and decorating the gifts. The young volunteers “were integrated with enthusiasm from the first day, especially when understanding the noble cause,” said Victor Garcia, who is responsible for overseeing the project. He went on to emphasize the importance of the contributions made by the students.

First organized in 2014 by toy manufacturer, Spin Master, the “Toy Movement” initiative has delivered toys free of charge to boys and girls in deprived areas around the world. Every December, toys are delivered to children in areas of conflict or marginalization, including Gaza, Israel, and Jordan. This marks the second year the Tecma Group has partnered with Toy Master’s global initiative to benefit the children of Mexico.

“The ‘Toy Movement’ aims to be more than a mere act of social responsibility,” commented Tecma in a statement. “We seek to return to the community something that has been given to us and at the same time to promote family values among our collaborators.”

Alan Russell, Founder and CEO of the Tecma Group of Companies, commented, “We are excited to be able to give back to the community…This year, being able to give away 18,000 quality toys to the children of the city of Tijuana is monumental.” Last December, Tecma and Spin Master gave away nearly 4,000 toys to underprivileged children in Ciudad Juarez.