Mexico Becomes Top U.S. Trading Partner
As the U.S. moves away from China economically, Mexico has become the primary trade partner for the United States. This development offers insight into the potential trajectory of other Latin American countries - specifically Colombia.
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30 years ago, U.S. politicians claimed that one of the fundamental values of the new international order after the Cold War was the free market. In theory, the possibility of acquiring goods at a better price through the cost advantages of production outsourcing would increase the well-being of American society.
It was largely for this reason that China managed to join the World Trade Organization (WTO) in 2001, with the aim of achieving a beneficial and peaceful trade globalization under the leadership of the United States.
At least that was the idea. But since then, U.S. leadership has significantly changed its tune, and the new consensus is that China’s rise is a major threat to American security.
Increasingly - and especially during the presidency of Donald Trump - the U.S. has recognized the threat posed by the commercial, economic, and productive dependency on China. The Biden administration has also been promoting an active policy of ‘decoupling’ from China, especially since the end of the COVID-19 pandemic. As a result, Mexico is now the U.S.'s top trading partner, replacing China as of August of this year.
This move has major implications. For one, as we’ve mentioned before, it represents the acceleration of the ‘geofragmentation’ process currently taking place on the global political stage.
It will also have a strong impact on countries in Latin America and other developing regions. As the U.S. moves away from China economically, it will seek out allies for nearshoring and supply-chain integration, and naturally it will look to its neighbors on the American continent.
In this article, we’ll look at how we arrived at this point, what it means, and how it will affect the global landscape moving forward.
The China Question
As we mentioned, the relationship with China has substantially deteriorated in recent years. However, the influence of its economy on the world, and particularly on the United States, has grown significantly during these years of diplomatic deterioration. Between 2014 and 2022, the Chinese economy became the United States' primary trading partner, displacing Canada.
Economists and political analysts began to raise concerns about Chinese trade practices and the substantial trade surplus that the country had gained with the U.S. in less than two decades. Specifically, industrial sectors reported numerous instances of dumping maneuvers on key industrial components that harmed North American production capacity and led to a decrease in real wages within the sector.
The 'trade war' with China largely began for these reasons. The interpretation among American elites is that China employs its economic and trade influence to strangle key sectors of the U.S. economy, such as technology and industry, where it could gain a military advantage in the long term, as noted by the Brookings Institution. A clear example of this is seen in the steel, iron, and microprocessors segments.
The COVID-19 pandemic also underscored the dependence of many Western countries on trade with China, particularly for essential goods or inputs crucial for national security. Since then, the agendas of the United States and Europe have focused on a gradual ‘decoupling’ from the Chinese economy. After all, the hegemony of the United States and the security of the Western world are at stake.
What is a possible solution to these issues facing the Western world? In our most recent report, we mentioned the existence and ongoing nature of the process of geo-economic fragmentation. There’s no doubt that the world’s major powers are placing a higher emphasis on their own security over open markets, leading to a process of deglobalization in which the focus is on trade with allied countries, and investment is encouraged within the spheres of influence of each global power.
There are many symptoms of the geoeconomic fragmentation. First, since 2008, global trade has constituted a decreasing proportion of countries' GDPs. Paradoxically, it is China that is currently seeking to enhance international trade liberalization and reduce trade barriers.
Secondly, one of the major outcomes arising from the conflict between Russia and Ukraine is the economic division between Europe and Russia. Before the war, Russia used to supply around 45% of the EU's imported gas, but currently, that proportion has dwindled to less than 10%. To counter the shortage, the European Union ramped up its imports from the United States, solidifying and defining an area of geoeconomic fragmentation.
Among these symptoms is Mexico's rise as the U.S.'s primary trading partner, and it's not solely about trade, but also concerns the relocation of outsourcing services, workforce, and strategic production. In essence, 'nearshoring' in Mexico primarily aims to shape the United States' long-term sphere of influence within the global context of geo-fragmentation. In other words, Canada, Mexico, Europe, and select strategic allies in the Pacific and Latin America will constitute the core sphere of American influence.
U.S. Influence and the American Continent
In a scenario where the global hegemony of the United States is under strain, the sphere of influence that the U.S. is developing requires establishing an institutional network that encompasses Western countries. Among the organizations that constitute the current expanded Western order are the Organization for Economic Co-operation and Development (OECD) for international trade, the North Atlantic Treaty Organization (NATO) for military purposes, the Organization of American States (OAS) for continental control, and the USMCA agreement for essential economic components.
Mexico is a member of the majority of these "clubs" and simultaneously, it's the only nearby country capable of providing low labor costs to establish a bordering nearshoring system in favor of the United States' interests. When we examine Mexico's export map to the United States, it's evident that there's a clear concentration in sectors of heavy industry, mechanics, electronics, and to a lesser extent, medical equipment. In other words, Mexico aims to become a key supplier in the grand strategy of the United States.
Trade between the U.S. and Mexico reached $263 billion during the first four months of this year, accounting for 15.4% of total American trade. In a standard manufacturing supply-chain setup involving both nations, intermediary products are manufactured in a U.S. facility and subsequently sent to Mexico, where they are incorporated into the assembly process before the end product is transported back to the U.S.
This prompts us to inquire about other countries, aside from Mexico, that could gain from the decoupling with China, are part of the Western Order, and simultaneously prove to be a viable option for nearshoring and strategic investments for the United States.
Winners on the American Continent
It is evident that one of the key strategic priorities for the United States is the resilience of its supply chains, in addition to cost-effectiveness. This is the essence of outsourcing in Western countries. In our latest report, we highlighted the countries with the greatest potential for the medium and long term in this regard. The true beneficiaries of economic geoeconomic fragmentation are neutral countries that can gain advantages from contenders seeking allies.
And particularly, those countries that are already part of some of the institutional networks that make up the Western order will be the first to benefit. This is the case of Colombia, which is a member of the OECD, the OAS, and is the only Latin American country declared a strategic partner of NATO and hosts U.S. military bases on its territory.
The arrival of President Gustavo Petro negatively shook expectations regarding the institutional landscape, but once in office, he has proven to be a reliable ally to the U.S. This substantial reversal in the economic and political outlook has led to a strengthening of the Colombian peso in recent times, which peaked at around $5,000 COP to the dollar in early January and has since declined to around $4,100. Additionally, the sustained growth of Colombia's economy (graph below), close to 7% compound annual growth rate (CAGR), shows how resilient this economy has been after the pandemic.
The rise of Mexico as the top trading partner of the U.S. is a fascinating insight into the potential trajectory of other countries in the Latin American region. As the U.S. continues to move away from China and towards its neighbors on the American continent, countries like Colombia will find themselves highly sought after as a target for foreign trade and diplomatic relations. Needless to say, this will have a positive effect on the Colombia's economy, and will lead to significant upside potential for those who can access assets in the country.
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