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China vs. Mexico: How the China Tariff War Has Changed Things

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China vs. Mexico: How the China Tariff War Has Changed Things

By Doug Donahue, Entrada Group

“We’re concerned about tariffs on our Chinese-made products. Can Mexico help us?”
Within the past six months, this is the most common question we hear from manufacturers contacting Entrada for the first time.

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Despite President Trump announcing the extension of a March 1 deadline on tariffs for goods made in China, many manufacturers with production facilities in China remain concerned. That’s because many pundits and policy watchers feel that the Trump administration is fomenting a trade war with China merely for short-term political gain, as a negotiating ploy to bring Beijing to the table and close the $375 Billion-plus trade deficit between the two countries. This get-tough approach can potentially be extremely harmful, both to international manufacturers already operating in China (companies that have spent millions of dollars and many years setting up operations and relationships, and otherwise investing in China) as well as to manufacturers that are putting overseas expansion plans on hold (in China, Mexico or elsewhere) as they wait out an uncertain future clouded by the threat of tariffs. The longer the issue drags out, the greater the potential economic effects may be.

Weighing the Options: Mexico vs. China
So if you’re an international manufacturer contemplating Mexico or China, what elements do you need to consider? Should you assume that the 30% tariff is just a negotiating chip and that, eventually, tariffs will stabilize at a lower rate?

Consider how a Mexico production footprint would support your growth over the long-term. Over the past five years, Mexico has decreased in cost due to the ongoing decline of the Peso against the US Dollar. Over the same period, costs in China have all gone up: labor, transport, overall operations, etc. So from purely a cost standpoint, the countries are at parity.

At the same time, Mexico holds two tremendous advantages over China (no matter what happens on the tariff front): protection of intellectual property and proximity to US/Canadian markets. These key factors won’t change anytime soon, and they help tilt the scale to Mexico’s favor.

It’s at this point that the China tariff factor assumes greater importance, depending on whether or not you already have your own production in China. If you concede that Mexico already holds two key advantages over China, while also assuming that costs are roughly equal, the threat of a 30% tariff on China-made goods takes China off the table completely. Unless, of course, you’re already producing at your own China facility. In which case, you’re stuck until the trade war has fully played out.

It’s important to point out that this aspect applies to producers that control their own manufacturing. This approach does NOT apply if you work with a subcontractor, and are not locked into a long-term production contract. In the event that you work with a subcontractor, you could switch to Mexico subcontracting while you wait out the tariff outcome, and then switch back once the trade war is resolved. In fact, if you can find a capable subcontractor for your product in Mexico, you may benefit from such a strategy.

Another Angle to Consider
Of course, on one level, deciding between China OR Mexico isn’t even necessary. That’s because, over the long-term, you will eventually be better off with both cost-competitive production locations, as your customers will prioritize suppliers that have regional production nearby, by rewarding them with global production contracts.

This global/local low-cost production solution (cost-competitive regional production in the Americas, Europe and Asia) positions savvy producers best of all, giving them multiple cost-effective hubs to be closer to customers and also minimize risks against global events outside of their control.

So a presence in the Americas (Mexico) and Asia (China) keeps you ahead of the competition and brings Mexico production online in the event there are complicating factors in China, like a trade war.