Marc Levinson

Month: February 2024

  • More than Cheap Labor

    It’s been no secret that Chinese companies have been building factories in Mexico to protect their access to the United States market in the face of high U.S. tariffs on many Chinese exports. The Financial Times has now put numbers on this: using figures from Xeneta, a data analytics company, and Container Trades Statistics, a data supplier, the FT estimates that the number of containers from China imported into Mexico rose 28 percent in the first three quarters of 2023, compared with the same period of 2022.

    This needs to be kept in perspective: Mexico’s containerized imports from China over those nine months, the equivalent of 881,000 twenty-foot containers, are about what the United States imports directly from China in a single month. Nonetheless, it’s obvious that many Chinese companies see Mexico as a ticket to the United States. Many Mexican exports enter the United States duty-free under the U.S.-Mexico-Canada Agreement. The remainder typically face very low tariffs. While the punitive duties the United States has imposed on many Chinese products since 2018 generally apply to Chinese-made goods shipped to the United States through Mexico, they may not apply to goods that are in some way transformed in Mexico, such as Chinese-made components used to make other products in Mexican factories. Several Chinese vehicle manufacturers are reportedly scouting sites for Mexican assembly plants from which they could export to the United States with low or zero tariffs, causing considerable distress in Washington.

    Predictably, a blowback is underway, with talk about rewriting the rules of origin that determine what is a Mexican product for purposes of U.S. Customs. If done right, this could actually benefit Mexico.

    At present, there is little Mexican value added other than factory labor in most of the manufactured goods that come across the border into the United States. Nearly half the value in Mexican exports originates in other countries. If Chinese-owned factories in Mexico must incorporate more North American value added in order to receive U.S. trade preferences, they will likely need to undertake more sophisticated activities in Mexico, such as making more of their own inputs there and engaging more Mexican engineers, designers, and programmers. That could help the Mexican economy become more than a cheap labor play, which the 30-year-old free-trade arrangement among Mexico, Canada, and the United States has distinctly failed to do.

  • Misguided Missiles

    I’ve received several inquiries from journalists asking my thoughts about how the attacks on commercial ships off the coast of Yemen are likely to affect trade and shipping. There’s no question that the unfriendly fire of the Houthis and their Iranian sponsors since November 19, when black-clad fighters carrying automatic weapons dropped from a helicopter onto the deck of a car-carrying vessel in the Red Sea, is outrageous. But for the world economy, the disruption of shipping as carriers avoid the Red Sea and the Suez Canal is an inconvenience, not a catastrophe.

    Some people seem to associate the current goings-on with the supply-chain chaos during the COVID-19 pandemic. Then, port closures, crew shortages, and delays moving cargo into and out of container terminals led to hundreds of sailings being cancelled at a time when demand for manufactured goods was unexpectedly strong. At one point, more than 500 container ships were queuing outside harbors on three continents to load or discharge. Freight rates reached the stratosphere. Manufacturers and retailers had no idea where their goods were or when they might be delivered.

    Conditions today are quite different. Before November 19, the cost of shipping a 40-foot box had tumbled to the lowest level in four years and a record level of shipbuilding portended excess capacity well into the future. The Houthis’ attacks have led many carriers to sail around Africa, lengthening the trip between Shanghai and Rotterdam by eight days to three weeks, depending on how fast the carrier wants to steam. The longer voyage times have sopped up excess capacity, restoring the pricing power container carriers lost with the end of the pandemic. They must pay more for fuel, wages, and mortgage or lease payments on each trip, but save by avoiding Suez Canal tolls. Higher ocean freight costs will likely be reflected modestly in consumer prices, but they are not likely to turbocharge inflation.

    Although ocean transport is taking longer than it did before the Houthis took aim at merchant shipping, the impact of those delays is related mainly to private companies’ decisions about how to structure their supply chains. That’s why I find it troubling that the United States and several other countries claim to be attacking Houthi fighters and weapons systems “to defend lives and the free flow of commerce.” When we read that shipping delays have led to retailers lacking goods to sell and an auto assembly line closing for want of parts, we should remember that companies, not governments, determine where to obtain inputs and how much inventory to hold in the warehouse. Some companies work harder than others to make their supply chains resilient. Protecting those that have chosen to accept greater risk of supply-chain disruption is not a good reason to shoot missiles at Yemen.