The Transborder Trade Threat to USWC Ports

Jock O’Connell

Even while I was solemnly engaged in commemorating the Irish High Holy Day on March 17, I did take notice of a headline in a prominent shipping industry publication proclaiming that Chinese exports to Mexico’s Pacific Coast ports had “skyrocketed” in January.

The headline bannered an article, citing a “global freight intelligence platform”, that reported ocean-borne imports from China had “surged nearly 60% year over year (y/y) in January”. That wave of inbound TEUs, the article breathlessly explained, reflected China’s growing investment in manufacturing operations in Mexico. Those investments, the report ominously concluded, will pose a long-term threat to U.S. West Coast (USWC) ports because, unlike goods produced in China or in Chinese-owned factories in Southeast Asia, the hecho en Mexico output of these near-shored factories would enter the U.S. market by truck or rail and not aboard ocean carriers.

Shortly after, another report popped up in my inbox announcing that the New Year was seeing “exponential” growth in Chinese shipments to Manzanillo and Lazaro Cardenas, Mexico’s chief West Coast container ports.

Most of us appreciate that a single month of data does not establish a trend. In some newsrooms, however, isolated bits of information can bait headline writers into indulging in hyperbole. Editors are, after all, forever thinking about how best to grab the attention of passing eyes. I’m reminded of the time in the spring of 1976 when my otherwise peaceful stroll through London’s Mayfair district was brought up short when I spied a lad hawking a fresh-off-the-press Evening Standard whose frontpage blared out this news: “O’Connell Shot”. (Depending on your perspective, Mr. O’Connell was either a notorious Irish terrorist or a brave Irish patriot, but not a close relative.)

Hence the topic:  how much of this is fact and how much is hyperbolic headline?  

There is no question that Chinese manufacturers have been relocating to lands that are less likely to attract the attention of U.S. Customs inspectors or Congressional critics of free trade. Nor is there any question that Chinese investment in Mexican industrial parks has been burgeoning, just as Japanese investments had a generation earlier. Even before Mexico, Canada, and the United States ratified the North American Free Trade Agreement in 1993, foreign direct investment had flowed into what were then called maquiladoras. These were manufacturing plants, usually located near the U.S. border, which offered easier access to the U.S. market, a low-cost labor force, and a relatively lax regulatory environment. By the 1990s, more than a million Mexicans were employed in maquiladoras.

The Chinese are just the latest to capitalize on Mexico’s proximity to the world’s richest consumer market. However, Chinese companies are now the fastest-growing source of foreign direct investment in Mexico. According to a new report from Procopio, a legal services firm that advises international investors, Chinese investment predominantly targets the manufacturing sector, encompassing diverse projects such as computer servers, construction equipment, electric vehicles, and furniture. In most instances, components must be imported due to a currently inadequate supplier base in Mexico.

Not surprisingly, as Exhibit A attests, China’s role in Mexico’s import trade has been creeping upwards for the past decade.

More importantly for USWC ports, the share of Mexico’s imports that arrived by sea grew from 25.0% in 2010 to 58.4% last year. And just under 85% of Mexico’s seaborne imports from China arrived at the Ports of Manzanillo and Lazaro Cardenas, the chief maritime gateways on Mexico’s Pacific shore.

But before attributing all of the heightened seaborne imports to an ambitious scheme to evade U.S. tariffs on Chinese imports, there may be other reasons for an apparent surge of Chinese shipments into these two ports. For one thing, we shouldn’t ignore the broader context. Most immediately, we shouldn’t discount the possibility that low-water restrictions at the Panama Canal have led to a rejiggering of the routes Chinese shipping had been accustomed to following from Shanghai or Ningbo to ports throughout the Caribbean and along the Atlantic Coasts of both North and South America. With the improvement of rail service between Mexico and the U.S. heartland, some of those Chinese imports through Manzanillo and Lazaro Cardenas might otherwise have been intended for Port Houston.

Nor should we overlook the simple fact that Mexico is itself a large market with a population of 132 million and a gross domestic product of nearly two trillion U.S. dollars. Mexico ranks as the world’s 12th largest economy, smaller than the Russian Federation, but larger than South Korea. GDP per capita is a respectable US$25,880, according to the International Monetary Fund. So expanding your economic footprint there is something of a no-brainer for a country seeking to dominate global commerce.

In the end, though, it is hard to reconcile the current burst of media excitement about surging Chinese imports into Manzanillo and Lazaro Cardenas early this year with the available data.

The fact is that, outside of reporting on a steady-long term trend, none of this should be considered newsworthy.

Consider Exhibit B. Chinese shipments to Mexico’s two top Pacific Coast ports have been steadily increasing and exceptionally brisk in recent years. Volumes rose more than six-fold to 137,874,618 metric tons in 2023 from 21,154,509 metric tons just ten years before.

Exhibit C breaks down the trade by major commodities, revealing that growth has been particularly fast in the automotive sector. It is a share apt to grow due to the presence in Mexico of Chery and BYD, two of China’s premier manufacturers of electric vehicles.

So, yes, the fact that Chinese companies are expanding their manufacturing capacity in Mexico will ultimately affect business at USWC ports. But that’s nothing new. There was nothing sudden or surreptitious about the arrival of Chinese companies in Mexico. Nor should anyone be shocked that foreign direct investment breeds imports.

So goods produced by Chinese-owned factories in Mexico will enter the U.S. market almost exclusively by truck or rail, just the same as garments manufactured in a Chinese-owned factory in Bangladesh will find their way to American consumers via an Atlantic Coast port. This is not to say that the number of inbound loaded TEUs at USWC ports will shrink. Rather, their capacity for growing existing volumes of imports may be circumscribed. 

We may not have reached Peak Globalization in which the absolute volume of goods traded internationally will flatten or decline. But what we are definitely seeing is a fluid reshaping of the geographical environment in which countries exchange products.

Rather than sensationalizing a single data point, maybe this global trend should merit a BREAKING NEWS headline instead.