New Tariff Policy Amplifies the United States’ Efforts To Bolster Nearshoring Strategy

By Patrick Welch and Marsha Cotton

On May 14, 2024, President Biden announced a sharp increase in U.S. tariffs on several Chinese imports, including electric vehicles, solar cells, semiconductors, and advanced batteries.¹ The announcement underscored what many media outlets have proclaimed for the last several months: we are in the midst of a massive shift in the global supply chain market.² The significance of this announcement is amplified by recent geopolitical events that have severely disrupted the global supply chain: the COVID-19 pandemic, Russia-Ukraine war, China-Taiwan conflict, Red Sea attacks, and the Baltimore bridge collapse. Due to these events, the ongoing global demand for automobiles, medical supplies, semiconductors, and clean energy have increased the U.S.’s incentive to relocate manufacturing closer to home.

Indeed, just a few months ago, the U.S. confirmed its commitment to join in the Inter-American Development Bank’s pledge to invest $3.5 billion over the next several years to increase “nearshoring” expansion of business activity in Latin America and the Caribbean.³ The term “nearshoring” is used to describe the business practice of relocating manufacturing operations out of Asia and India and back to the U.S. and its neighboring countries, often with a shared border, so that companies can take advantage of lower labor costs, lower freight costs, and speed to market.⁴ Many similar terms have arisen over time: reshoring, onshoring, and ally-shoring. Each of these terms are all used to describe the same overarching phenomenon: the accelerated development of product supply chains between countries located in the Western Hemisphere.

The last two U.S. presidential administrations have implemented distinct policies aimed at incentivizing U.S. companies to relocate closer to home. Under the Trump administration, the imposition of Chinese tariffs included a broad swath of goods in an attempt to dissuade U.S. consumers from using Chinese goods and instead choose domestic alternatives.⁵ The tariffs also extended to countries traditionally viewed as U.S. allies.⁶ Alternatively, the Biden administration has taken a more targeted approach, focusing the increase in tariffs to a select group of emerging high-tech industries such as electric vehicles and semiconductors.⁷ In addition, President Biden’s announcement included the proposition that these tariffs could be levied even if Chinese manufacturers try to move their production of these goods to Mexico in an effort circumvent U.S. tariffs by ultimately exporting Chinese products to the U.S. through Mexico.⁸

Mexico, the primary beneficiary of U.S. nearshoring policies, has seen an increase in cross-border trade under both the Biden and Trump administrations. Since the passage of the United States Mexico Canada Agreement (USMCA) in 2020 — a free trade agreement between the three countries that largely replaced the agreement formerly known as “NAFTA” — Mexico has become one of the core manufacturing locations for second and third tier automotive suppliers, agriculture goods, and other items that are bulky or expensive to transport.⁹ Specifically, the value of goods traveling northbound into the U.S. from Mexico totaled $454.8 billion in 2022, up 18.9 percent from 2021, and up 64 percent from 2012.¹⁰ Border states, like Arizona, have reaped significant benefits from the USMCA with the largest share of Arizona imports coming from Mexico and growing exponentially.¹¹ In 2023, the value of goods imported from Mexico into Arizona totaled $11.8 billion, which is a 7.9% increase from 2022.¹²

Even with trade values steadily increasing year to year, there are still significant challenges standing in the way of the U.S.’s large-scale nearshoring policies. It cannot be overlooked that the May 14 announcement regarding Chinese investment in Mexico is twinged with the underpinning of the Monroe Doctrine — a historic U.S. foreign policy that any intervention in the political affairs of Latin America by foreign powers is a potentially hostile act against the U.S. requiring intervention.¹³ While not overtly relying upon the Monroe Doctrine’s inherent paternalistic underpinnings to justify current U.S. trade policies in Latin America, including nearshoring, these policies nonetheless appear to echo these antiquated sentiments and ignore Latin American countries’ sovereign desire to chart their own course in the global economy.¹⁴ Indeed, many of Mexico’s top sources of foreign direct investment come from multinational corporations, including some from China.¹⁵ Mexico’s own foreign direct investment objectives, in some cases, might not completely align with U.S. trade policies vis-à-vis China, thereby leading to difficult discussions and potential tensions between them. Ultimately, the U.S. must strike an appropriate balance between its goal of protecting U.S. and Latin American markets from foreign economic threats without alienating its regional allies through perceived paternalism. To achieve these goals, the U.S. will need to engage in a delicate dance with its regional allies, like Mexico, grounded in rule of law and other trade norms by invoking legal remedies under the USMCA and other global and regional trade regimes, thereby limiting accusations of a return to the Monroe Doctrine.

Footnotes

1. Jim Tankersley and Alan Rappeport, Biden Hits Chinese Electric Vehicles, Chips and Other Goods With Higher Tariffs, The New York Times (May 14, 2024), https://www.nytimes.com/2024/05/14/us/politics/biden-china-tariffs.html?smid=nytcore-ios-share. [Back]
2. Aimee Donnellan, Mexican Wave of Nearshoring Firms is All at Sea, Reuters (March 20, 2024, 4:59 AM MST), https://www.reuters.com/breakingviews/mexican-wave-nearshoring-firms-is-all-sea-2024-03-19/. [Back]
3. Dep’t Treas. News Release JY-2198, 2024 WL 1210287 (March 21, 2024). [Back]
4. Recent Trends In US Services Trade 2023 Annual Report, Inv. No. 332-594, USITC Pub. No. 5431, 2023 WL 3749830 at *33-34 (May 2023). [Back]
5. Heather Long, Trump Has Officially Put More Tariffs On U.S. Allies Than On China, The Washington Post (May 31, 2018, 5:34 PM EDT), https://www.washingtonpost.com/news/wonk/wp/2018/05/31/trump-has-officially-put-more-tariffs-on-u-s-allies-than-on-china/. [Back]
6. Id. [Back]
7. Supra at 1. [Back]
8. Josh Boak, US Suggests Possibility Of Penalties If Production Of Chinese Electric Vehicles Moves To Mexico, Associated Press (May 14, 12:35 PM MST), https://apnews.com/article/biden-tariffs-ev-china-mexico-tai-809b0e27339d38dcd3834d2cbb14e1d1. [Back]
9. Mexico Country Commercial Guide, International Trade Administration (Nov. 4, 2023), https://www.trade.gov/country-commercial-guides/mexico-automotive-industry. [Back]
10. Mexico Trade and Investment Summary, Office of the United States Trade Representative, Executive Office of the President, (last visited May 20, 2024), https://ustr.gov/countries-regions/americas/mexico#:~:text=U.S.%20goods%20imports%20from%20Mexico,overall%20U.S.%20exports%20in%202022. [Back]
11. Arizona-Mexico Economic Indicators, University of Arizona Eller College of Management, (last visited May 20, 2024), https://azmex.eller.arizona.edu/imports/imports-from-mexico. [Back]
12. Id. [Back]
13. Tom Long and Carsten-Andreas Schulz, The Return of the Monroe Doctrine, Foreign Policy Magazine (Dec. 16, 2023 7:00 AM), https://foreignpolicy.com/2023/12/16/monroe-doctrine-united-states-latin-america-foreign-policy-interventionism-china-gop/. [Back]
14. Id. [Back]
15. Enrique Hernandez-Pulido, Juan D. Arau and Julian Zou, Nearshoring in Mexico: Some Basics for Chinese Companies, Procopio (March 15, 2024), https://www.procopio.com/nearshoring-mexico-chinese-companies/#:~:text=In%20recent%20years%2C%20direct%20investment,and%20%24282%20million%20in%202022. [Back]