Mexico City, Mexico — As the top suppliers of manufactured goods to the American market, China and Mexico have typically been in direct competition over the past decade.

More often than not, the business went to China. But with labor costs rising there and Mexico pushing for new access to Chinese consumers, the rivalry is shifting, economists and trade analysts say.

Mexico and China Expanded Trade Partnership Could Benefit the US

No longer pure competitors but not quite partners, the two countries are moving toward an expanded trade relationship that could ultimately benefit the United States by boosting US exports and keeping cheap imports flowing to US consumers.

Mexican President Enrique Peña Nieto’s recent trip to China, coming just four months into his term, has been viewed here as a smart overture aimed at mending ties between two nations that have often been at odds over trade issues. Mexico resisted China’s entry into the World Trade Organization in 2001, and its share of the US import market started slumping soon after.

Now that trend is in reverse. Mexico accounts for a growing portion of US imports, and China’s slice of the $2.7 trillion market has narrowed. Those tendencies are likely to continue, economists say, as several new studies show that Mexican manufacturing costs are lower than China’s when factors such as shipping and energy prices are accounted for.

"They started out as rivals, because there was a bull rush to China and Mexico lost out," said Barry Lawrence, director of the Global Supply Chain Laboratory at Texas A&M University. "But Mexico is now the more competitive of the two."

Business in China Will Come Through Mexico

"That implies direct competition, but the reality is that the two will be looking at building optimal supply chains," Lawrence said. "There will be a lot of business in China, but a lot of it will come through Mexico."

Items such as washing machines, cars, computers, and farm equipment can start as component elements in China that are assembled in Mexico and finished in the United States before reaching American consumers. If companies can take advantage of each country’s manufacturing strengths, the result will be quality products at the lowest-possible prices, analysts say.

Likewise, the United States and Mexico can find new fuel for economic growth and help each other reduce their gaping trade deficits with China by working together to sell more goods to the swelling Chinese middle class.

Mexican poultry and pork raised on US grains can feed Chinese consumers. Cars made jointly by Mexican and United States auto plants can cater to China’s seemingly boundless demand for automobiles.

In recent years, Mexico has accumulated an even bigger trade imbalance with China than the United States, importing nine times as much as it sends across the Pacific. The US deficit is closer to 4 to 1.

But if Peña Nieto’s trip can serve as an opening, China can be "a land of enormous opportunity if handled right," said Duncan Wood, the director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington. "China is a market that is untapped for Mexican business."

During his visit to China, Peña Nieto met with President Xi Jinping and signed new commercial agreements, including a deal to sell Mexican oil to China for the first time on a sustained basis, guaranteeing shipments of at least 30,000 barrels a day. It’s a modest amount for the world’s seventh-largest oil exporter, but the deal was seen as a gesture of good faith nonetheless.

"The Chinese perspective has been: I’m more important for you than you are for me, so if you want to improve the relationship, fantastic," said Enrique Dussel, the director of the center for China-Mexico studies at Mexico’s National Autonomous University. "But there are very strong frictions and tensions between the two governments. We’ve had a lot of meetings but limited and weak results."

The China vs. Mexico Competition is Over

Still, Dussel said, the idea that China and Mexico are rivals for the US market is increasingly outdated. "The competition is over," he said. "In general terms, China is much more developed than Mexico."

For example, one of the Mexican economy’s biggest success stories, its booming auto industry, produced a record 2.5 million cars last year — Fords, Nissans, Volkswagens, and other brands. "China produced 20 million cars," Dussel said. "And 30 percent of them were Chinese brands with domestic technology."

Yet the same sizzling growth that has made China the world’s largest exporter has created labor shortages and sent wages higher at a rate of "10 to 20 percent a year," said Harold Sirkin, a senior partner at the Boston Consulting Group, a worldwide management consulting firm. "That changes the equation for the whole world, and Mexico will be a big beneficiary, as well as the US."

But even as Mexico becomes a more attractive destination for foreign manufacturers, economists say those same companies are not likely to pull up their stakes in China, given that the Chinese market is the fastest growing in the world.

Instead, companies are likely to continue making products in China and Mexico, shifting some activities to North America in order to take advantage of lower energy costs, proximity to US consumers, and the tax breaks offered by the NAFTA free trade agreement.

In the past, "Mexico wasn’t even brought up" during business meetings in China, said Derek Leathers, president of Werner Enterprises, a global shipping and logistics company that works in 120 countries. But during a recent trip there, "I don’t think I had a single meeting where at some point I wasn’t asked about Mexico."

The interest isn’t based on concern for competition so much as the investment possibilities for Chinese companies. Mexico is Latin America’s second-largest economy after Brazil, but unlike the South American giant, it has attracted relatively little Chinese investment. That, too, could change.

"Chinese companies realize a good hedge," said Mexican economist Luis de la Calle. "Large multinationals have invested heavily in China, and now they need to diversify, and Mexico is a good bet."