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Chinese firms skip over US tariffs by setting up shop in Mexico

Bloomberg | 141 September 2022

Chinese firms skip over US tariffs by setting up shop in Mexico

By Max de Haldevang

Chinese manufacturers looking to sidestep US tariffs and shorten pandemic-ravaged supply chains have found the perfect solution: Mexico.

Plants and warehouses are sprouting up south of the border as companies take advantage to proximity to the world’s biggest consumer market.

“If you want to do good business with America, you must have something close to the market,” says Simon Huang, country manager for Kuka Home, a Chinese furniture manufacturer with operations at Hofusan Industrial Park that’s located in a prime spot between Mexico’s industrial capital and the US border.

That isn’t Mexico’s only selling point. Thanks to the country’s free-trade pact with the US and Canada, a chair made at Kuka’s factory in Hofusan can travel across the border duty-free, whereas one shipped to the US from China would be hit with a 25% tariff, according to Huang.

Chinese investment in Mexico jumped from $154 million in 2016 to $271 million the following year, when Donald Trump took office threatening a trade war. The pandemic’s supply-chain snarls and the angst caused by Chinese President Xi Jinping’s tech crackdown have catapulted yet more Chinese companies across the Pacific, with investment in Mexico hitting just under $500 million last year.

Chinese companies aren’t the first to seek shelter from US tariffs in Mexico. Japanese automakers began opening plants in the country in the 1990s in response to a barrage of import restrictions that began under Ronald Reagan.

Firms from China have faced some operational challenges in Mexico. The US-Mexico-Canada Agreement, which replaced Nafta, requires that a higher proportion of the value of any good must come from North America to qualify for tariff-free treatment. But Mexico doesn’t boast extensive networks of suppliers across a large number of industries, making it trickier to source materials.

Some of the new arrivals have other issues to contend with. Huang of Kuka Home says his Mexican workers are more inquisitive than those at home. “Mexican people always ask why—‘Why should I do this?’ ‘Why should I do that?’” Huang says. “They want to understand the reason.” Another difference: Workers in Mexico generally won’t clock 16-hour days, like employees in China are willing to do.

 source: Bloomberg