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- Mexico overtook Canada as the US' top trading partner at the start of 2023.
- US trade with China has been edging lower since 2018, except for a spike during the pandemic.
- US supply chains are changing after former President Trump launched a trade war against China.
Mexico has edged out China as the US' top trading partner.
In the first six months of the year, about $397 billion worth of goods moved between the US and Mexico — this is 44% higher than the $276 billion worth of goods that passed through the US and China, according to the latest data from the US Census Bureau.
The shift came after years of changing supply chains after former President Donald Trump ignited a trade war against the East Asian giant around 2018. This, in turn, prompted investors to reassess their geopolitical risks, kicking off a shift in global supply chains.
The shift accelerated since the start of 2020 as China's zero-COVID policy drove home the importance of not depending on one country for manufacturing needs.
These two charts show how US trade flows have changed over the last 20 years.
Mexico became US' top trading partner at the start of 2023
Federal Reserve Bank of Dallas
Due to the tensions between Washington and Beijing, China wasn't actually the US' top trading partner when Mexico zoomed into the top spot — it was Canada.
Canada was the US' top trading partner since at least 2000 before being overtaken by China in 2014. The North American country was vying with Mexico for the top spot after 2018 following tariffs Trump levied on Chinese imports.
Chinese imports into the US did spike briefly in 2020 as the pandemic disrupted manufacturing and supply chains elsewhere, but they started trending lower later in the same year, the graph shows.
Now, Mexico's in the top position thanks to its manufacturing sector, Luis Torres, a senior business economist at the Federal Reserve Bank of Dallas, wrote in a July 11 post.
"Mexico's gains mirror its rise in manufacturing, a key component of goods moving between it and the US," Torres added.
Mexico is China's top US manufacturing trading partner
Federal Reserve Bank of Dallas
Mexico's rise as a factory hub is apparent as it became the US' leading manufacturing trading partner in 2022 after knocking China off its perch.
"Mexico's expanding manufacturing base has offered an alternative to producing in China," Torres wrote in the note.
Mexico also has a geographical advance as an alternative to China in the trend for manufacturers to "nearshore" their operations to the US, a large consumer market. "Nearshoring" refers to sourcing or producing goods from a nearby country.
Top imports from Mexico include vehicles, machinery, and mineral fuels.
"The automotive industry is an especially active example of the cross-border manufacturing relationship," wrote Torres." A US plant typically produces an intermediate good that is then exported to Mexico where it becomes part of the assembly process before a final product is then imported back into the US.
In fact, even Chinese manufacturers are moving to Mexico to serve their US customers amid tensions between Washington and Beijing. They include TV set-maker Hisense and various car parts makers.