In the midst of the pandemic, when global supply chains collapsed and the cost of shipping a container to China increased almost twenty-fold, Marco Villarreal saw an opportunity.
In 2021, Mr. Villarreal resigned as general manager of Caterpillar in Mexico and began pursuing relationships with companies that wanted to move production from China to Mexico. He found a customer in Hisun, a Chinese maker of off-road vehicles, which hired Mr. Villarreal to build a $152 million manufacturing facility in Saltillo, an industrial center in northern Mexico.
Mr. Villarreal said foreign companies, particularly those looking to sell in North America, see Mexico as a viable alternative to China for several reasons, including simmering trade tensions between the United States and China.
“The stars aligned for Mexico,” he said.
New data released Wednesday showed that Mexico overtook China to become America’s top official source of imports for the first time in 20 years, a significant shift that highlights how rising tensions between Washington and Beijing are reshaping trade flows.
The United States’ trade deficit with China narrowed significantly last year, with imports of goods from the country falling 20 percent to $427.2 billion, the data shows. American consumers and businesses turned to Mexico, Europe, South Korea, India, Canada and Vietnam for auto parts, shoes, toys and raw materials.
At $475.6 billion, Mexican exports to the United States were roughly at the same level as the previous year.
America’s total trade deficit in goods and services, which is made up of exports minus imports, decreased by 18.7 percent. Overall, U.S. exports to the world rose slightly in 2023 compared to the previous year, despite a strong dollar and a weak global economy.
U.S. imports declined annually as Americans bought less crude oil and chemicals and fewer consumer goods, including cell phones, clothing, camping gear, toys and furniture.
The recent weakness in imports and decline in trade with China was partly a reflection of the pandemic. American consumers stuck at home during the pandemic bought Chinese-made laptops, toys, Covid tests, sporting goods, furniture and home exercise equipment.
Even as coronavirus concerns eased in 2022, the United States continued to import many Chinese products as bottlenecks at congested U.S. ports finally eased and companies replenished their warehouses.
“In 1921 the world did not have access to enough Chinese goods, and in 1922 it was gobbling up Chinese goods,” said Brad Setser, an economist and senior fellow at the Council on Foreign Relations. “Everything has returned to normal since then.”
But beyond the unusual fluctuations in annual patterns in recent years, trade data is beginning to provide compelling evidence that years of heightened tensions have significantly affected America’s trade relationship with China.
In 2023, quarterly U.S. imports from China were about the same level as a decade ago, despite a decade of growth in the American economy and increasing U.S. imports from other parts of the world.
“We are decoupling, and that is putting a lot of strain on trade flows,” Mark Zandi, chief economist at Moody’s Analytics, said of the U.S. and China.
Economists say the relative decline in trade with China is clearly linked to tariffs imposed by the Trump administration and then maintained by the Biden administration.
Research by Caroline Freund, dean of the University of California at the School of Global Policy and Strategy in San Diego, showed that trade with China for products with high tariffs, such as screwdrivers and smoke detectors, fell, while trade for products that had no tariffs fell applications that declined, such as hair dryers and microwave ovens, continued to grow.
Ralph Ossa, the World Trade Organization’s chief economist, said that trade between the United States and China has not collapsed but has grown about 30 percent slower than trade between those countries and the rest of the world.
There have been two episodes in recent history in which U.S. trade with China slowed significantly, he said. The first was when trade tensions between the countries escalated in 2018. The second was when Russia invaded Ukraine, prompting the United States and its allies to impose tough sanctions and further reorder global trade relations.
“There was a time when geopolitics did not play a big role in trade, but as uncertainty increases in the world, we are seeing trade become more sensitive to these positions,” said Stela Rubinova, research economist at the World Trade Organization.
Some economists warn that the decline in U.S. trade with China may not be as severe as bilateral data shows. This is because some multinational corporations such as Hisun, the Chinese vehicle manufacturer, have shifted some of their production from China to other countries, but continue to source some raw materials and parts from China.
In other cases, companies may simply route goods that are actually made in China through other countries to avoid U.S. tariffs.
U.S. trade statistics do not record such products as coming from China, even though a significant portion of their value would have been created there.
Ms. Freund, who recently wrote an article on the subject, said the two countries’ trade relations were “definitely weakening, but not as much as the official statistics suggest.”
Nevertheless, geopolitical risks are clearly causing companies to focus on other markets, particularly those with low costs and stable trade relationships with the United States, such as Mexico.
Jesús Carmona, the president of Mexico and Central America at Schneider Electric, the French appliance giant, said the Biden administration’s 2022 climate law and geopolitical tensions stemming from the war in Ukraine were both factors pushing companies to Mexico.
When China appeared to side with Russia in the conflict, “that raised all sorts of alarms,” Carmona said. “People have realized that we cannot have the kind of dependencies on China that we have built up over the last 40 years when we made China the factory of the world.”
Schneider, which already had a significant presence in Mexico with nine factories and nearly 12,000 employees, decided in 2021 that it needed to continue growing in the country. After opening new production sites and expanding existing plants, the company now employs around 16,000 people in Mexico, and the number is expected to soon rise to around 20,000.
Schneider sends about 75 to 80 percent of its production in Mexico to the United States, including a range of products such as circuit breakers and panels to distribute and regulate electrical power.
While foreign direct investment in developing countries fell 9 percent in 2023, the flow of such investments to Mexico rose 21 percent last year, according to data from the United Nations Conference on Trade and Development.
Another economy affected by the US-China switch is South Korea. Like Mexico, South Korea is subject to lower tariffs because it has a free trade agreement with the United States. In December, U.S. imports from South Korea were the highest on record.
South Korean companies have also particularly benefited from President Biden’s new climate legislation. The U.S. government offers tax credits for consumers who buy electric vehicles, but has placed certain limits on sourcing parts of these cars from China.
As major manufacturers of electric vehicle batteries and components, South Korean companies have seized the opportunity to participate in the newly expanding U.S. vehicle supply chains. A Korean battery maker, SK On, has invested $2.6 billion in a factory in Georgia and is building new facilities in Georgia, Tennessee and Kentucky in collaboration with Hyundai and Ford.
Min Sung, chief commercial officer of SK On, said China is becoming more restrictive towards Korean companies. Meanwhile, U.S. restrictions on China benefiting from electric vehicle tax credits have “given more leeway” to Korean companies.
“For a company to survive, you always have to find the market that has more potential,” Mr. Sung said.
As major Korean companies such as SK, LG, Samsung and Hyundai build new facilities to manufacture products in the United States, this also appears to be increasing U.S. trade with South Korea as companies import some materials, machinery and parts from their home countries for supplies the new facilities.
In December, Korean exports to the United States exceeded Korean exports to China for the first time in 20 years, driven by shipments of vehicles, electric batteries and other parts.
Mr. Sung agreed that increasing American skepticism toward China would bring the United States and South Korea closer together.
“It has never been stronger between two allies than in recent years,” he said.