Shifting trade dynamics: Is China losing advantage to ‘nearshoring’?

China, renowned as the world’s manufacturing hub, has been a major exporter of various goods and services. However, recent export data from the world’s second-largest economy suggests a significant shift in global trends, potentially posing a threat.

In July, China experienced a sharp decline in exports, dropping by 14.5 per cent compared to the previous year, amounting to $281.8 billion. This signals a persistent economic downturn post-COVID-19, with July marking the third consecutive month of decreasing exports. June saw a 12.4 per cent drop, while May experienced a decline of 7.5 per cent.

Interestingly, Mexico and Canada have surpassed China as the top trading partners of the United States this year. American companies are increasingly focusing on reshaping their supply chains closer to home.

Chinese official data released on Friday revealed over 80 per cent year-on-year plunge in foreign investment in China during the second quarter.

While a general global demand slowdown, weakening consumer demands for goods and retreating business inventory growth contribute to the decline in Chinese exports, a closer examination of the export data suggests another significant factor.

Furthermore, the disruptions caused by the COVID-19 pandemic and the ongoing conflict in Ukraine, combined with efforts to reduce dependency on China, have led to the emergence of the ‘nearshoring’ phenomenon, impacting global supply chains.

US approach of  ‘nearshoring’ to reallocate trade

Nearshoring refers to moving business activities to a nearby country. It’s a way of working closer to home compared to offshore outsourcing, where companies find suppliers in distant places to cut costs.

A report from the Center for Strategic and International Studies called “Nearshoring to the Americas” talks about the importance for the US to create new trade agreements with countries in the Americas. This would make supply chains safer and stronger by spreading them out.

The report also says that the trade issues between China and the US are making some businesses move their operations from the US to Mexico. In the future, other countries in Latin America might do the same if they get similar benefits for trade and investment with the US like Mexico has.

The growing divide between the United States and China regarding human rights, fair trade, and competition in technology and markets is causing concerns for their trade relationship. However, this divide has yet to affect the purchasing habits of American customers, as there is still strong demand for Chinese-made products like phones and clothing.

Additionally, the Biden administration is trying to portray a positive image of US-China trade. They try to assure Chinese authorities that the US is focused on reducing risk in commercial ties by moving important supply lines to the US or its allies rather than completely cutting economic ties.

However, due to increasing national security worries, the administration has stopped sending advanced computer chips to China and will announce more restrictions on US involvement in Chinese technology sectors shortly.

Shifting US trade dynamics to Mexico

Recent data from the US commerce department shows that Mexico has taken over from China as the leading provider of goods to the US. In the current year, the US has purchased goods worth $203 billion from China, a 25 per cent decrease compared to last year.

This shift holds significant importance due to the size of U.S.-China trade, one of the world’s largest. The US has a considerable trade deficit with China, highlighting the significant influence of the Asian powerhouse on the world’s biggest economy.

Furthermore, as per a report by Morgan Stanley, increased investment resulting from nearshoring could reach $46 billion over the next five years. This could drive Mexico’s annual GDP growth to around 3 per cent during 2025-2027, a noticeable rise from the projected 1.9 per cent in 2022.

Manufacturing companies in the United States are relocating production closer to their home base and consumers, moving away from Asia. Moreover, besides its geographical proximity, Mexico offers a large, cost-effective labor pool and free-trade agreements with the United States and Europe.