'Made in Mexico' trade controversy is provoking another kind of border war

Mexico's robust, and booming, trade with the United States has logistics companies clamoring for a slice of the pie and politicians taking a cautious look at how overseas firms may be using recent North American trade law to circumvent U.S. tariffs.

Integrated logistics companies like Maersk are building out their capacity to handle the historic trucking volumes of Mexican trade entering the US., a trend fueled by use of the United States, Mexico and Canada (USMCA) Free Trade Agreement signed into law by former President Donald Trump as a replacement for NAFTA.

Sparking controversy is language within the USMCA that covers how a product gains the "Made in Mexico" designation from U.S. Customs. Under USMCA, if raw materials or components of a product are brought into Mexico and then assembled there, the final product is "transformed" into another product and may be exempt from various tariffs as a result.

Earlier this week, Zekelman Industries, the largest independent steel pipe and tube manufacturer in North America, filed a lawsuit against the Republic of Mexico alleging violations of trade agreements and dumping of steel on the U.S. market. The company says these violations forced Zekelman to close its Long Beach, Calif., tube manufacturing factory in 2022, and will force it shut down another facility in Chicago next year, with the closures resulting in the loss of 400 U.S. jobs.

"Chinese companies, if they import directly into the United States, they are faced with tariffs, if they bring their goods into Mexico and those goods are improved upon or at some value added to them, they then qualify for the USMCA," explained Jordan Dewart, CEO of Redwood Mexico, a logistics companies which handles cross-border trade. "This is how Chinese goods are able to circumvent the tariff," he said.

Both Chinese companies and European companies that once manufactured products in China are now diversifying supply chains by manufacturing in Mexico, a trend can be seen in the amount of containers transporting Asian raw materials and components into the southern neighbor nation of the U.S. From January to August 2024, China to Mexico trade was up 22% year over year, on top of a 33% increase in trade in 2023.

Increasing foreign direct investment from Chinese and European companies into Mexico is fueling a historic increase in cross-border trucking between the nation and the U.S., with "Made in Mexico" products serving key sectors including automobiles, technology/electronics, and textiles. There is bipartisan concern about Mexico serving as a trade "back door" for Chinese exports to evade tariffs.

The Biden administration amended the global steel and aluminum tariffs first imposed by former President Trump, which had granted Mexico and Canada an exception as recently as July. Now, duties on steel and Mexican products that were melted or poured outside of North America, or aluminum either cast or smelt in China, are included in the tariffs policy to ease concerns that Chinese steel and aluminum are coming into the U.S. under the USMCA.

The trade changes are tied to broad logistics trends, including long-term need to nearshore supply chains after years of escalating global risks, and are legal under U.S. law.

"The backdoor has a connotation that they're doing something wrong and they are not necessarily doing anything wrong," said Mary Lovely, Anthony Solomon senior fellow at the Peterson Institute for International Economics. "Just because you see a Mexican manufacturer using Chinese inputs does not mean that they're violating any rules of origin." 

Trump threats not slowing trade boom

Trump has said he wants to renegotiate the USMCA deal he struck with the North America partners in 2020. One key provision was a requirement for the countries to begin reviewing the trade deal after six years, a process that will begin in July 2026. Chinese manufacturing in Mexico will be a likely part of the trade renegotiation.

Trump has campaigned on imposing a 20% tariff on all goods from all countries, and tariffs on Chinese imports ranging from 60-100%.

Threats of additional tariffs are not slowing down trade with Mexico. Year-to-date through September, cross-border trucking traffic rose by approximately 52%, according to the latest data from Motive, which tracks trucking visits to North American distribution facilities for the top five domestic retailers.

Companies like DHL, Uber Freight, a subsidiary of Uber, Maersk, and others are buying up land and building warehouses and distribution centers in El Paso and Laredo, Texas, to capture that trade. The more touch points a company has in the logistics of a product, the more money it can make.

"We've seen billions of dollars of foreign direct investment go into Mexico," Dewart said. "That will translate into manufacturing facilities and finished goods destined for the United States. So we're very bullish on the outlook for Mexico and we're investing heavily into this marketplace."

Redwood Mexico has facilities in El Paso.

According to a recent nearshoring report from Moody's Analytics, China and East Asia are playing a growing role in Mexican exports.

In the world of logistics, companies site operations based on expectations for future growth, and factors that should contribute to a more bullish outlook. In addition to the current increase in trade volumes, companies look at how much foreign direct investment is allocated by companies looking to set up manufacturing facilities in Mexico.

Freight railroad Canadian Pacific Kansas City is building a new railroad bridge from Laredo, Texas, to Mexico to handle the uptick in container traffic. The bridge will be constructed alongside an existing one and is expected to be operational in 2024.

"If you look at all the ground crossings between the U.S. and Mexico, 44% of that crosses at Laredo, between Nuevo Laredo and Laredo," said Coby Bullard, senior vice president at CPKC. "So for us to go in and double the capacity of that gateway is going to improve the supply chain between the two countries." 

The rail has also launched a new train service for shippers linking Chicago and Kansas City to Monterrey, Mexico. 

According to Rhodium Group, which is an expert on FDI and Chinese investment in North America, an estimated $3.7 billion of Chinese foreign direct investments was made in Mexico in 2023. But the Mexican boom is not limited to China, or Asian manufacturing either.

"The north part of Mexico is getting invaded with foreign investment, and people are coming from all over the world, from Asia, from Europe, from South America, even from Africa," said Simon Cohen, CEO of logistics company Henco. "Some investments are coming to Mexico, and they are trying to build plants and manufacturing facilities to enter the United States market."