Mexico's recent policy shifts in the apparel industry are creating a complex interplay between fostering domestic production, reducing reliance on China, and acknowledging the continued importance of Chinese imports for sustaining its own exports. While incentives for nearshoring aim to attract manufacturers and boost local sourcing, rising tariffs on textiles and finished apparel products raise questions about Mexico's long-term strategy and its relationship with China in this sector.

Growing focus on ‘Made in Mexico’

President Claudia Sheinbaum's ‘Plan Mexico’ with a focus on nearshoring and tax benefits for local and foreign companies, signals a clear intention to strengthen Mexico's domestic apparel industry. The government's push to increase Mexican-made components in various sectors further underscores this commitment. "What isn't made here can be made here," says Francisco Cervantes, President of Mexico's business coordinating council CCE, highlighting the potential for domestic production.

However, the increased tariffs on textile and apparel imports, reaching up to 35 per cent for finished goods, complicate this narrative. While aimed at protecting Mexico's domestic industry, these tariffs also impact the flow of raw materials and intermediate goods from China, which remain crucial for many Mexican manufacturers. "No one knows what to do," Ryan Martin, President of distribution and fulfillment at ITS Logistics, told FreightWaves. "Everyone is exploring options right now." This situation creates a complex landscape for the apparel industry.

Of course, nearshoring has its own incentives. Tax benefits and government support for local manufacturing could attract investment and create new jobs in Mexico's apparel sector. And by shifting production closer home, North American companies can reduce supply chain vulnerabilities and potentially shorten lead times. Also, Mexico's commitment to the USMCA trade agreement provides a framework for increased regional collaboration and potentially mitigates some of the tariff impacts.

New tariff’s impact

However, the new tariffs increase the cost of importing textiles and finished apparel into Mexico, impacting both Mexican and American businesses. The tariffs directly affect the viability of using Mexico as a conduit for importing goods from China under the Section 321 provision. And companies relying on existing supply chains through Mexico may need to re-evaluate their sourcing and fulfillment strategies.

Table: US apparel imports from Mexico, China

(Source: US Census Bureau, data adjusted for estimated 2024 figures)

The table clearly demonstrate the substantial role both Mexico and China play in the US apparel market. The new tariffs and nearshoring incentives could significantly alter this dynamic in the coming years.

Mexico's China perspective

Despite the nearshoring drive and tariff increases, Mexico cannot entirely disregard its reliance on China for textile inputs. China remains a significant supplier of fibers, yarns, and fabrics, essential for Mexico's apparel exports.

Table: Mexico’s textile imports from China

(Source: UN Comtrade Database, data adjusted for estimated 2024 figures)

Chinese textiles often offer a significant cost advantage, making them attractive to Mexican manufacturers seeking to maintain price competitiveness in the global market. Moreover, China provides a wide range of specialized fibers, yarns, and fabrics that may not be readily available or cost-effective to produce domestically in Mexico. And many Mexican manufacturers have established long-standing supply chain relationships with Chinese suppliers, making a sudden shift impractical.

Mexico now faces a delicate balancing act. It seeks to boost domestic production and reduce reliance on China, while acknowledging the continued importance of Chinese imports for its own export competitiveness. This necessitates a nuanced approach. To begin with Mexico may need to strategically source certain textile inputs from China while simultaneously investing in domestic production capacity for other materials. Meanwhile, encouraging joint ventures and technology transfer from China could help Mexico develop its own capabilities in producing specialized textiles. The government may need to consider targeted tariff adjustments or exemptions for specific textile inputs crucial for Mexico's export-oriented industries.

Mexico's push for nearshoring and its increased tariffs on textiles create a dynamic and evolving situation for the apparel industry. While opportunities exist for companies willing to adapt and invest in local production, challenges remain in navigating the changing cost landscape and supply chain complexities. The long-term impact on the North American apparel market will depend on how effectively businesses and governments can leverage these changes to foster sustainable growth and regional collaboration.