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22 Nov 2024
3 min read

When elephants fight: Does US-China decoupling help or hurt Mexico?

While a US crackdown on Chinese re-routing could hurt Mexican growth, that must be weighed against solid macro policies and the long-term gains from friendshoring.

Elephants herd

Mexico is usually seen as a beneficiary of the US-China rift. It is close to the US, both geographically and in terms of political system, has a trade agreement with its neighbour and is a manufacturing powerhouse just like China. Indeed, Mexico overtook China as the US’s key supplier in late 2022.

However, the return of Donald Trump to the US presidency could also spell trouble for Mexico, particularly as the trade agreement between the US, Canada and Mexico is up for review in early 2026. Among Trump’s stated priorities is clamping down on Chinese products that find their way into the US through Mexico. 

So, what is happening?

Between 2016 and 2024, advanced technology exports from Mexico to the US jumped by 70% to above $90 billion a year. The biggest increases were observed in IT, electronics, life sciences and aerospace exports – all products in which Mexico does not have a comparative advantage.

Three-quarters of the increase in Mexican high-end manufacturing exports to the US is matched by Mexican high-end manufacturing imports from China and East Asia (often used as transit point for Chinese exports).

This all points to Chinese exports entering the US through Mexico. The fact that many of the exports are advanced technology products gives the US an additional national security reason for a crackdown.

How would it hurt Mexico if the US banned Chinese exports entering via Mexico? It is unlikely that Chinese products are just rerouted through Mexico. More likely, they are further processed in Mexico before entering the US. This Mexican value added would disappear if the US cracks down.

To get a sense of the damage to Mexico, we assume that the final Chinese products entering the US contain 30% Mexican value added. Combined with hard numbers on Chinese value added entering the US via Mexico, we can infer that Mexico could lose 1% of GDP if there were a complete ban.[1]

Investment implications

Despite the above headwinds we remain constructive on Mexico’s prospects.

For starters, Mexico continues to pursue strong macro policies. It has the highest real policy rate after Brazil and plans a 2ppt fiscal consolidation next year. We don’t share concerns about the judicial reform. The Polish example shows that economic and asset performance remain unaffected, at least over our investment horizon.

Second, at 1% of GDP the damage to Mexico is not negligible, but neither is it huge. Also, the US may show restraint on the economic front if Mexico can offer help on illegal migration. Medium-term, Mexico is still likely to benefit from US near- and friendshoring, particularly if Trump follows through with 10% tariffs across the board.

Finally, the bad news looks to be in the price with the Mexican peso down 20% since April. We have recently increased our exposure to the peso across portfolios.

 
[1] There could be an additional impact from the US targeting Chinese capital in Mexico. However, Mexican data on FDI from China is of poor quality and it is not clear whether that capital serves the Mexican or US market.

United States US Dollar Emerging Markets
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Erik Lueth

Global Emerging Market Economist

Erik identifies investment opportunities across emerging markets. He uses quantitative models, past experience and lots of common sense. Prior to joining LGIM, Erik worked for…

More about Erik

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