China, Mexico, and the Rewiring of US Supply Chains

A paper by the Board of Governors of the Federal Reserve System, “Mexico in US Supply Chains: Lessons from 2018–19 Tariffs,” examines how the 2018–19 US–China tariffs reshaped trade, with Mexico becoming the largest supplier of US imports. It asks whether Mexico’s export surge reflects real competitiveness gains or indirect effects of China relocating production or routing goods through Mexico.

Using a decomposition framework, the authors find that about 53% of Mexico’s export growth to the US is due to trade diversion from the tariffs. Around 14 percentage points is linked to Chinese production activity in Mexico, while most of the rest comes from Mexican and other foreign firms expanding production. True transshipment of Chinese goods is found to be minimal.

The main conclusion is that tariffs mainly trigger real supply chain relocation rather than simple rerouting, but they also create indirect exposure to China through production shifts to third countries like Mexico—including in fast-growing sectors such as AI-related goods.