The last year or so has seen major changes to the global trading environment, and one of the most consequential is the growing trade war between the US and China. 

While the global economy also continues to suffer from challenges such as high inflation, a growing range of tariffs and export controls has caused bilateral trade between the two nations to dip significantly.

This has opened up opportunities for other trading relationships, and one of the biggest beneficiaries of this has been US-Mexico trade. Bolstered by the implementation of the USMCA free trade agreement in 2020, imports and exports across the border have grown significantly in recent years. It has been suggested that this could indicate a shift in how the US sources goods for the foreseeable future and reflect changes in the global economy.

Mexico cements position as the US' number one trading partner

It's now estimated that Mexico has replaced China as the US' biggest trading partner.  According to figures from the Federal Reserve Bank of Dallas, for instance, trade with Mexico accounted for 15.4 percent of goods exported and imported by the US in the first four months of the year, compared with 15.2 percent for Canada and 12 percent for China.

The impact of USMCA, which recently marked its third anniversary, is one significant factor behind this. It was recently noted by Mexico Institute director Andrew Rudman and Canada Institute director Christopher Sands in an article for The Hill that total trade between the US and its two USMCA partners hit a record $1.78 trillion in 2022. This marked an increase of 27 percent over pre-USMCA levels. 

By comparison, total US trade with China across the same period increased by just 20 percent. This has been hindered by additional duties, with around two-thirds of US imports from China (66.4 percent) subject to tariffs. The average US tariff on Chinese imports is 19.3 percent and applies to $335 billion in trade. 

This has offered significant opportunities to Mexico, which continues to be a major manufacturing base for the US, with the automotive sector among the main beneficiaries.

A return to regionalization of trade?

Luis Torres, senior business economist at the Federal Reserve Bank of Dallas, also suggested that the increased trade between the US and Mexico also signifies a move away from a globalized approach to trade and towards a more regionalized strategy.

For instance, he noted that 'nearshoring' - the practice of shifting supply chains to countries that are both geographically and politically more aligned with the US - increased during the Covid-19 pandemic, due to higher costs for shipping items across the Pacific. 

However, this has since continued as consumer expectations for fast delivery grow - a trend Business Insider described as the 'Amazon Prime Effect' - and this has been particularly beneficial to the US-Mexico relationship.

While evidence of more nearshoring remains largely anecdotal, Mr Torres said: "Increased protectionism and related industrial policy are consistent with less global trade, more regional trade, and nearshoring and reshoring."

Prospects for future growth

Several commentators and politicians have therefore suggested a promising future for US-Mexico trade. For instance, member of the US House of Representatives Henry Cuellar recently suggested that bilateral trade between the two nations could reach as much as a trillion dollars by 2030, up from $779 billion in 2022

This is set to be boosted by increased investment in infrastructure to support cross-border trade. Rep. Cuellar was speaking at a groundbreaking ceremony for a new logistics and industrial park in the border town of Roma, Texas. US Customs and Border Protection has reported a major uptick in trade through the Roma port of entry in recent years, with truck arrivals increasing from around 23 a day to around 200.

There do remain issues to be addressed within USMCA, with disputes arising between the US and Mexico over rules of origin for automotive parts, agriculture and energy policies, and Ms Rudman and Mr Sands warned that if such issues remain unresolved, or if governments ignore any unfavorable findings of USMCA panels, public support for the free trade agreement could be undermined.