In Maersk’s press release last week a few recent warehousing facility in Tijuana, Mexico, one line stood out. It was sandwiched between an inventory of value-added services offered and a paragraph concerning the facility’s sustainable energy practices and certifications.
“Alternatively, it could operate [fulfillment or e-fulfillment] operations into the US, leveraging the Section 321 Shipment Type** for e-commerce shipments.”
Under U.S. Customs and Border Protection rules, a Section 321 shipment is an import to the US that, since it’s valued at lower than $800, is exempt from tariffs. This rule has gained attention as a method to sidestep the additional costs of moving goods into the U.S. So Maersk’s inclusion of it in the discharge isn’t any afterthought.
The availability is widely used to support cost-effective cross-border movement of products. The brand new facility is designed to capitalize on exactly that, across greater than 320,000 square feet of space.
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It’s inside 10 miles of the Otay Business Port, situated between San Diego — which has already seen a marked increase in truckload volumes in recent times, particularly within the last one — and Tijuana. It’s also just barely greater than 12 miles from the San Ysidro Business Port, bridging San Ysidro, California, with Tijuana.
Mexico has seen a surge in imports from China in recent times. In response to Xeneta, China exported 60% more containers to Mexico this January than it did in January 2023.
RELATED: Is Mexico becoming the brand new China?
Analysts consider U.S. e-commerce consumption and the de minimis exemption for imports below $800 in value are fueling this. While Section 321 would also apply to ocean cargo shipped from China on to the U.S., Mexico has turn out to be increasingly attractive for warehousing and success purposes.
The geographical good thing about Mexico’s proximity to the U.S. is compounded by the robust manufacturing and export services infrastructure supported by Mexico’s IMMEX program. This system facilitates streamlined processes for foreign corporations to import materials, manufacture goods after which export them, often to the U.S., while having fun with tax and duty exemptions.
These elements mix to create a gorgeous proposition for Chinese businesses seeking to maximize efficiency of their supply chains and minimize costs related to tariffs and long-distance shipping.
China’s rising exports to Mexico
When a U.S. consumer buys something on Amazon from a Chinese storefront, the order sets in motion a reasonably sophisticated chain of events. A notification of the order is distributed to the vendor, who might be operating directly from China or via a warehouse in Mexico.
Upon receiving the order, the vendor prepares the item for shipment. If the product is positioned in China, it’d first be sent in bulk to Mexico, leveraging the strategic benefits offered by Mexico’s logistics infrastructure and trade agreements. More likely is that if the Chinese shipper desires to benefit from Section 321, the shipper has already warehoused the inventory in Mexico.
Each item destined for the U.S. is then individually packaged and valued at lower than $800 to make sure it meets the standards for duty-free entry. This valuation is vital, so for dearer, multipart products, it sometimes is smart to ship multiple boxes with a purpose to distribute value.
The packaged goods are then transported to the U.S.-Mexico border, either directly from a Mexican warehouse or after arriving in Mexico from China. On the border, the consignments are subject to inspection by CBP. Because of the precise labeling and adherence to the Section 321 rule, these packages typically qualify for expedited customs processing.
Once cleared through customs, the shipments enter the U.S. logistics network and are directed next to distribution centers strategically positioned across the country. Here, the packages are sorted and dispatched for final delivery.
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While Chinese exports each to the U.S. and to Mexico have shown strong growth over the past five years, the latter trade lane’s growth because the middle of 2022 far surpasses the previous. The Inbound Ocean TEUs Volume Index from China to the U.S. (IOTI.CHNUSA) shows a 31% increase since late-March 2019, while that very same index from China to Mexico (IOTI.CHNMEX) shows an enormous 134% climb over the identical period.
While it’s difficult to say definitively what’s driving this growth, a few of it is probably going related to tariff skirting. A further cause might be the continued investment in Mexico’s manufacturing infrastructure. It’s possible that this nearshoring development requires injections of raw materials from Asia.
Border markets like those of Laredo, Texas, and Tucson, Arizona, have outpaced the common truckload demand growth for the U.S. in aggregate since 2019. This trend is more likely to proceed, barring legislative or executive change.
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Will it proceed?
The trade war between the U.S. and China began in 2018, when then-U.S. President Donald Trump imposed comprehensive tariffs on Chinese goods, citing unfair trade practices. This move set off a reciprocal imposition of tariffs, resulting in a big escalation. The U.S. targeted $550 billion price of Chinese products. In response, China placed tariffs on $185 billion price of U.S. goods.
A brief truce was reached with the signing of the Phase One Deal in January 2020. This agreement aimed to ease the tariff war through commitments to diminish tariffs, boost trade purchases and address contentious issues reminiscent of mental property theft and technology transfer. The trade war’s impact was widespread, and its breadth and scale have drawn comparisons to historic protectionist measures, reminiscent of the Smoot-Hawley Tariff Act of 1930.
Trump’s recent campaign trail statements, vowing to levy a 100% tariff on cars produced in Mexico by Chinese firms if he wins reelection, shed recent light on the complex interplay of international trade and economic strategy.
While the immediate response could also be to view the circumvention of U.S. tariffs by Chinese entities through Mexico as a loss to the U.S. treasury, this is also framed as a broader, more strategic profit to the U.S.
The shift of Chinese manufacturing and trade flows toward Mexico carries with it potential for profound economic transformation within the region. The gradual buildup of production capability, spurred by Chinese investment and the relocation of producing activities, hints at a future wherein Mexico becomes an increasingly robust and capable trade partner.
RELATED: US-Mexico cross-border trade totaled almost $800B in 2023
This evolution may lead to a discount in U.S. reliance on more distant and potentially unstable global trade lanes, that are vulnerable to disruptions from geopolitical tensions or global supply chain crises. Strengthening Mexico’s economy and its manufacturing sector could render North America’s supply chain more resilient, providing the U.S. with a stable and reliable source of products from a neighboring country.
This increased trade between the U.S. and Mexico could partially offset revenue lost because of tariff avoidance. Moreover, a prosperous Mexico contributes to regional stability and security, which is very precious given the shared border.
On this light, the long-term strategic benefits of fostering a stronger, more economically capable Mexico could well justify the short-term losses incurred from tariffs that will not be collected on Chinese goods.
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