When we last analyzed the fallout from shifting global supply chains, we highlighted the looming growth in U.S. East Coast port traffic as imports from Southeast Asia increasingly bypassed gridlocked West Coast ports. From July 2020 to November 2021, monthly imports from Southeast Asia to the East Coast rose by an average of 32% above 2019 levels. Trade route traffic has continued to shift as higher shipping costs, tariffs and pandemic disruptions roil overseas supply chains. Meanwhile, trade clarity provided by the United States–Mexico–Canada Agreement is driving import growth with trade partners closer to home, specifically Mexico.
Trends for U.S. trade in goods show a strong rise in imports from Mexico and Canada after the USMCA went into effect in July of 2020. Monthly import values from July 2020 to November 2021 have come in 14% and 8% above 2019 values, respectively, for Mexico and Canada. Imports to the U.S. have surpassed pre-pandemic levels for both countries, though this has occurred faster for Mexico. In fact, the swift and strong recovery in U.S.-Mexico trade is most apparent in inbound truck figures.
The number of inbound trucks from Mexico to the U.S. surpassed pre-pandemic levels, growing around 11% in 2021, after contracting only 2% in 2020. Meanwhile, inbound truck counts from Canada shrank by 8% in 2020 and failed to recover to pre-pandemic levels, despite 7% growth in 2021, according to the U.S. Department of Transportation’s Bureau of Transportation Statistics. Both trade partners have largely benefited from a strong recovery in U.S. consumer demand, although Mexico appears to be faring better.
After the implementation of USMCA, shifts in consumer spending significantly expanded global trade in goods. But the logistical pressure from this surge in demand has upended global supply chains as well, driving shipping costs higher. In this environment, Mexico appears to benefit due to its proximity and competitive import costs compared to China.
Since the China-U.S. trade war started, tariffs placed on Chinese imports have remained elevated along with higher shipping costs. Tariff- and shipment-related costs as a share of customs value for Chinese imports saw a significant increase starting in 2018, according to U.S. Census Bureau trade data. Costs to import Chinese goods as a share of customs import value grew from around 8% in 2018 to over 18% in 2021, while costs for Mexico have remained at around 2% over the same time period.
Import shipment costs have also risen in other countries, with farther-flung locations typically seeing higher costs. This is not the case for Mexico and Canada, which have very different cost structures despite similar geographic proximity to the United States. Mexico consistently provides both a lower shipment and tariff cost alternative.
As U.S. retailers and manufacturers develop shorter and lower-cost supply chains, Mexican exporters are poised to benefit, specifically maquiladoras, which are Mexico’s export-based assembly plants. Mexico’s National Institute of Statistics and Geography tracks the performance of these plants, with export figures since 2015 showing continued revenue growth. Maquiladora revenues for 2021 have surpassed pre-pandemic levels, albeit with diverging performance across the multinational cities on the U.S.-Mexico border. These border cities typically grow in tandem, with Tucson, Arizona/Nogales, San Diego/Tijuana, McAllen, Texas/Reynosa, El Paso, Texas/ Juarez and Laredo, Texas/Nuevo Laredo performing relatively better since 2019.
Research by the Federal Reserve Bank of Dallas indicates that a 10% increase in maquiladora production on the Mexican side of the border results in a 7.1% increase for Nogales, Arizona, employment, along with increases in Texas of 6.6% in McAllen, 4.6% in Laredo, 2.8% in El Paso, and 2.2% in Brownsville, according the Dallas Fed report. Recent employment trends for El Paso, McAllen, Brownsville and Laredo, which together make up over 60% of maquiladora revenue for the cities analyzed, show a strong performance through the pandemic as maquiladora business remained consistent.
Unemployment rates have generally retreated rapidly from pandemic peaks. El Paso and Laredo unemployment rates have dropped to 5%, below the 5.2% Texas average as of November 2021. McAllen unemployment remains elevated at 7.7%, largely driven by rapid labor force growth despite total employment already reaching pre-pandemic levels. At 6.9%, Brownsville, remains a laggard in the employment recovery, despite strong 2021 retail tax collections that point to a healthy consumer economy here.
Texas-Mexico border cities are not just interlinked with regard to employment, but also consumption, as around 30% to 40% of retail sales on the U.S. side can be attributed to Mexican nationals, according to the Federal Reserve Bank of Dallas. Although the pandemic affected border crossings and sales at the outset, 2021 retail tax collections across these cities have surged above 2019 and 2020 levels, as local and cross-border economies have reopened.
Goods consumption in these cities, which benefit from both local and international consumer demand, is expected to continue to accelerate, according to Oxford Economics forecasts. In fact, goods consumption for the four major multinational cities on the Texas-Mexico border is expected to grow 1.2 percentage points faster than the average for the nation. McAllen stands out, as goods consumption here is expected to outperform relative to the state of Texas as well.
In addition to the recent outperformance in employment and consumption growth, these four multinational cities are positioned to provide a growing labor force. All four cities are expected to grow their respective labor forces at a faster rate than the overall country, with McAllen and Laredo achieving similar growth performance to that of Texas. Strong labor supply, specifically in these last two cities, makes these more attractive for new industrial development and potential warehouse tenants.
Favorable trade trends, a rebounding maquiladora export economy, rising employment and consumption, coupled with a healthy labor supply, all paint an attractive picture for investment in these multinational markets.
Related: As US-Mexico Trade Booms, One Border City’s Industrial Market Reaps the Rewards
Industrial fundamentals also provide an encouraging view of these markets, with industrial vacancies at 5% or below for McAllen, Laredo and El Paso. The majority of available industrial supply has been absorbed since 2016, allowing vacancy rates to remain healthy across these geographies. New construction is limited, with forecast vacancies expected to remain tight as well.
Industrial investors and developers looking to navigate the newly emerging trade environment may want to consider a presence in McAllen, Laredo or El Paso. The healthy economic and demographic recoveries of these multinational markets, coupled with the current global trade backdrop, provide further room for these to grow into significant distribution hubs in the years ahead.
Juan Arias is a strategic consultant with CoStar Advisory Services in Boston.