On this road in El Paso, Texas, we can see thousands of trucks returning to Mexico after unloading billions of dollars of cargo.

For American consumers, millions of dollars of products enter the United States from Mexico every day. At the same time, this is the first time in more than two decades that Mexico has surpassed China to become the largest importer of goods to the United States.

In 2023, Mexico's merchandise exports to the United States totaled $475 billion, about $20 billion higher than the previous year. In addition to trade issues between Beijing and Washington, another factor is contributing to this phenomenon: Some Chinese companies that need to avoid U.S. tariffs are using Mexico as a producer to enter the U.S. market.

Why do Chinese companies come to Mexico to produce?

In the trade war between China and the United States, the United States has imposed huge tariffs on specific goods exported from China. There are only two paths before Chinese companies: change their supply chain (to avoid the huge tariffs on U.S. imports) or go bankrupt. .

Chinese companies have all chosen the former.

The U.S.'s increased tariffs on specific Chinese goods can be traced back to 2018, when the Trump administration launched a trade war with China and some Chinese companies moved their supply chains to Mexico. Products produced in Mexico need to be inspected by U.S. Customs and Border Protection (CBP) before entering the United States.

CBP is one of the largest law enforcement agencies in the world. An agency with more than 60,000 employees, the bureau conducts comprehensive inspections of products entering the United States, from hazardous materials to drugs to the product’s country of origin and more.

The Ysleta-Zaragoza bridge in El Paso, Texas, USA, carries most of the logistics from Mexico to the United States. Compared with the tariffs imposed by the United States on China, goods entering the U.S. market through this bridge enjoy tariff benefits under the USMCA, have extremely low or even zero tariffs.

Chapter 1 Evading U.S. Tariffs

To avoid U.S. tariffs, Chinese companies are moving raw materials and operations to Mexico.

Jordan Deward is president of the multinational logistics company Redwood Mexico, which has about 200 employees in Mexico in addition to the 100,000-square-foot warehouse in El Paso.

The situation in China's manufacturing industry has changed dramatically since the start of Trump's trade war.

Jordan Deward said: After the trade war, Chinese companies are facing a lot of pressure. Our company immediately saw the business opportunities brought by the relocation of Chinese companies to Mexico. We analyzed the ocean containers data tracked by NATA Freight Analysis Company.

From the data, we have seen for 18 consecutive months that container imports from China to Mexico have basically been growing. In recent years, L-shaped container shipments imported from China to Mexico have surged from January to August 2024. China to Mexico container trade is up 22% from the previous year, while container trade along the same route in 2023 is up 33% from 2022.

Meanwhile, China's container trade with the United States has also slowed.

The North American Free Trade Agreement (NAFTA) implemented in 1994 eliminated most tariffs between the United States, Canada and Mexico. The United States-Mexico-Canada Agreement (USMCA) that replaced the NAFTA came into effect four years ago and will be renewed in 2026. The focus of renewal negotiations is expected to be on trade issues with China.

Based on the USMCA, if Chinese companies import directly into the United States, they will face tariffs. If they bring goods into Mexico and those goods are improved or have some value added, they may be eligible for tariff benefits under the trade agreement.

For example, the raw material - wooden board - comes from China and is processed in a Mexican factory to turn it into a table. To some extent, the Mexican factory has substantially modified the product, the tariff HS code of the product has changed, and the economic nationality of the goods or the country of origin of the goods has changed.

In the past three years, at least 30 Chinese companies have established operations in Mexico. Nine Chinese automobile companies, including BYD, have established operations in Mexico. Jordan Deward believes: Chinese companies were established in Mexico and set up factories to produce products, and the products eventually entered the U.S. market. We cannot assume that Mexican manufacturers have violated any rules of origin just because we see them using Chinese raw materials.

Chapter 2 The Boom of Mexico’s Manufacturing Industry

Simon Cohen is the founder and CEO of logistics company Henko, which was founded in Monterrey, Mexico in 1998.

Six warehouse facilities in Mexico City owned by logistics company Henko. Part of the company's business is to receive raw materials and finished products from abroad, label them, repackage them and then ship to distribution centers or end consumers. .

The company has approximately 1,000 employees and has two warehouse facilities in Monterrey in addition to its facility in Mexico City. According to Cohen, about 20 to 30 percent of the goods here are shipped to the United States, and northern Mexico is being invaded by foreign investment, with investors coming from all over the world.

From Asia to Europe, from South America and even Africa, they are trying to build factories and manufacturing facilities in northern Mexico to get their products into the U.S. market.

Not only are the Chinese opening manufacturing plants in Mexico, but also European companies, which are moving product production capacity out of China and opening factories in Mexico to produce products.

Some of the top 10 companies investing in setting up factories in Mexico in 2024 include European companies such as Pearle Tires and Swedish auto parts maker SKF, as well as Tesla and General Motors, among others.

A key advantage of Mexico is that Mexican labor is generally cheaper than in China, but Mexico's proximity to the U.S. market may be its biggest advantage.

The United States and Mexico have 47 active land ports of entry, and approximately 6 million U.S. jobs depend on U.S.-Mexico trade. The United States is also Mexico's largest export market. Mexico's manufacturing sector accounts for about 40% of the country's $1.3 trillion economy.

In the industrial chain cycle of producing materials and parts, the United States and Mexico have a unique relationship. The manufacturing process of producing a certain product often requires crossing the U.S.-Mexico border multiple times.

Going back 30 to 40 years ago, T-shirts or tequila were made in Mexico, and now we see more complex products like aircraft engines, aerospace, automobiles, electric vehicles, etc. being made in Mexico. Mexico produces 3.5 million cars every year, 76% of which are sold to the U.S. market.

The top 10 commodities traded between Mexico and the United States are automobiles, computers and electrical machinery, among others.

Tesla announced in 2023 that it would invest about $5 billion in a new factory in the northern Mexican city of Montel, but the plan was shelved after Donald Trump threatened to impose 100% tariffs on Mexican-made cars.