U.S.-China Trade Disarray Sounds Like an Opportunity for Mexico -- But It Isn't Working Out That Way

By Robbie Whelan and Santiago Pérez

MEXICO CITY -- With global supply chains in disarray amid the U.S.-China trade war and the coronavirus pandemic, Mexico might seem a logical winner if U.S. companies decide they want to diversify away from China and make some products closer to home.

Mexico clinched a new trade deal with the U.S. and Canada last year and has now replaced China as the U.S.'s largest single trading partner.

"These trade frictions between the U.S. and China and the coronavirus should definitely be a godsend to Mexico," said Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc. "Mexico would be extremely well positioned to capture part of that trade."

While Mexico might benefit in the long run, there are plenty of reasons to be cautious about predicting a flood of companies heading there. For starters, the data doesn't suggest Mexico is enjoying an investment boom.

Foreign direct investment in Mexico fell 5.2% last year compared with 2018, according to preliminary government figures, while the economy shrank by 0.1% in 2019. Mexico's exports to the U.S. have grown modestly over the past year and a half, far slower than those from countries like Vietnam.

Supply-chain experts point to several factors. Despite the new U.S.-Mexico-Canada trade deal, the Trump administration could upend trade relations at any time.

Adding to the uncertainty are the economic policies of Mexico's nationalist President Andrés Manuel López Obrador and increasing violence that has turned parts of the country into no-go areas.

"I don't think trade relations are sufficiently settled to boost long-term investment in Mexico as a hub," said Gustavo Rangel, chief Latin America economist at ING Financial Markets. "Clearly China is a riskier bet, but it's unclear to what extent that benefited Mexico."

Apart from a jump in automotive exports in 2018, Mexico's manufactured exports haven't responded to the U.S.-China trade tensions with the expected surge, according to economist Brad Setser, a senior fellow at the Council on Foreign Relations.

Meantime, annual growth in U.S. imports of manufactured goods from Vietnam jumped to more than 40% in early 2019, and remained above 30% through the end of the year, according to Census Bureau data. Monthly U.S. imports of manufactures from Mexico grew around 10% a month in early 2019 but were falling at the end of the year, while U.S. import growth from China contracted sharply all year.

"It's impossible to make an argument in a statistical sense that there has been a large visible shift to Mexico," Mr. Setser said.

A big reason manufacturing might be sticking in Asia rather than relocating is that supply chains in industries like electronics are deeply entrenched, and Mexico lacks a deep supply chain in areas outside the automotive sector, Mr. Setser said. Overall costs in Asia are also still low.

Mexico, however, could still benefit over the longer term.

Manufacturing wages in Mexico are lower than in China, and the country isn't only next door to the U.S., but also shares cultural ties and similar time zones with U.S. firms.

In January, Jose Luis Bernal, Mexico's ambassador to China, said that at least three Chinese auto firms, including car maker Changan, electric-car manufacturer BYD and assembly and auto parts firm JAC Motors, planned to begin or expand production in Mexico in the next year.

And last year, sports-camera maker GoPro Inc. moved most production of its U.S.-bound cameras from China to the Mexican city of Guadalajara. At the time, a GoPro executive said the decision "supports our goal to insulate us against possible tariffs as well as recognize some cost savings and efficiencies."

Mr. López Obrador's policies are also undermining Mexico's foreign-investment potential, observers say. In his first year in office, he canceled the country's biggest public-works project, a partially built Mexico City airport, and halted any new oil auctions for private oil firms.

The latest private-sector casualty could be Constellation Brands Inc., which brews Mexico's venerable Corona beer for U.S. drinkers. The López Obrador administration is organizing a referendum on March 21 in the border city of Mexicali to decide whether the beer maker, one of Mexico's largest foreign investors, can complete construction of a $1.4 billion plant, after community groups raised objections about its intensive water consumption. The cancellation of such a large-scale project would send a wrong signal to foreign investors, executives say.

Mexico's lagging foreign investment is a long-term trend. Foreign direct investment averaged 1.6% of Mexico's gross domestic product over the past decade, compared with an average of 2.2% of GDP from 1995 to 2007, estimates Sergi Lanau, deputy chief economist at the Institute of International Finance in Washington, D.C.

Out-of-control criminal violence doesn't help. Last year was the bloodiest in Mexico's recent history, with 35,588 people murdered, according to government estimates.

In 2018, the American Chamber of Mexico, an association of business groups, polled 415 of its members on security issues and found that 25% of them believed their businesses were less safe than the previous year. Of those, 71% attributed the decline in security to the rise of organized crime. More than 14% of businesses questioned said they had suspended operations in certain Mexican states because of rising violence.

--David Luhnow and Anthony Harrup contributed to this article.

Write to Robbie Whelan at robbie.whelan@wsj.com and Santiago Pérez at santiago.perez@wsj.com

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March 15, 2020 07:14 ET (11:14 GMT)

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