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Why China’s tilt to Mexico matters to B.C.'s supply chain business

Multibillion-dollar infrastructure investments are shifting transpacific cargo flows further south
Asia-bound cargo ship docked at the Port of Vancouver’s Centerm container terminal.

Mexico has long been a favoured travel destination for British Columbians, and that is good for the local travel business. 

More recently, however, Mexico has become a favoured destination for investment from China’s state-run economy, and that is not good for B.C.’s transpacific trade prospects.

Vancouver and Prince Rupert are agile players in the transpacific cargo competition. But the hangover from pandemic cargo congestion along North America’s West Coast, 2023’s transpacific traffic slowdown, heightened China-U.S. geopolitical tensions, near-shoring initiatives, inflation and debt worries, and a down-bound economy have intensified that competition.

China’s Mexican-ports bet could determine transpacific trade’s long-term winner.

Mexico, after all, is a big part of China’s Latin American Belt and Road Initiative (BRI) investments, and a big part of China’s ambitious BRI and 21st century Maritime Silk Road infrastructure game plan is transportation.

Since 2005, it has invested an estimated US$4.1 billion in Mexico on such projects as the Hofusan Industrial Park in Nuevo Leon near Monterrey.

That investment makes sense for China.

Mexico has direct transportation connections to the United States, its labour costs are cheaper than Canada’s and it is part of the Canada-United States-Mexico Agreement (USMCA) free trade agreement.

Chinese companies setting up manufacturing operations in Mexico can take advantage of all three factors and avoid volatile transpacific shipping rates. Chinese companies exporting to North America through Mexico can take advantage of factors one and two.

B.C.’s ports have traditionally provided efficient and geographically advantageous Asian access to North American cargo distribution centres. Their most immediate competitors traditionally reside in Washington’s Seattle-Tacoma, California’s Los Angeles-Long Beach and other U.S. port hubs on the West Coast and in the Gulf of Mexico. 

But supply chain congestion issues, coupled with fears of another labour disruption at West Coast U.S. ports, have accelerated the migration of container cargo traffic to Gulf and East Coast options.

The June 2016 opening of a widened Panama Canal has also allowed larger ships to sail directly to North America’s Gulf and East coast ports.

Mexican ports have increasingly become another option.

According to the most recent numbers from U.K.-based global shipping consultancy Drewry, container cargo volume to Lazaro Cardenas, Ensenada and other West Coast Mexican ports has risen 26 per cent since 2019.

That increase, according to Eleanor Hadland, Drewry’s senior ports and terminals analyst, can be attributed in part “to the diversion of U.S.-bound cargo away from congested U.S. West Coast gateways.”

Hadland added that the trend, according to Drewry’s 2023 ports and terminals outlook, “will be sustained due to increased levels of investment in the Mexican manufacturing sector as major U.S. importers are seeking suppliers that are closer to home. In turn, this will increase the volumes of inbound raw materials and components, many of which will continue to be sourced from Asia.”

Outlining her company’s research during a March 14 shipping market update, Hadland said Drewry is “seeing that Chinese and other Asian companies are investing heavily in Mexico … recognizing the strategic importance of securing access to the U.S. market by a third country.”

She added that wages in Mexico have also remained low compared with some areas in key Chinese manufacturing centres.

Hadland said that one of the main benefits of Mexico as a near-shoring location for access to North America is its “great intermodal connectivity with the U.S.,” which provides direct cross-border links between key American markets and major Mexican manufacturing centres.

“And transit times from the Mexican manufacturing hubs into the U.S. Midwest markets are significantly shorter than from China or from Southeast Asia,” she said.

Hadland added that major Chinese investments are planned for a 400-hectare logistics hub in Michoacán’s Port of Lazaro Cardenas. The project’s announcement coincided with news that Walmart (NYSE:WMT) plans to move its logistics hub into Michoacán. Port of Manzanillo container cargo handling expansion projects are also underway.

Container throughput at Mexican ports is still far lower than what is handled at Los Angeles-Long Beach and other major U.S. cargo hubs. But the growth in their cargo-handling capacity coupled with the continuing migration of container ships away from ports farther north provides a cautionary tale for B.C. and the rest of North America’s West Coast.

Inbound container volume to West Coast U.S. ports was down 37 per cent in February compared with the same time in 2022, according to data compiled by container shipping analyst John McCown, who noted that it was the fifth straight month of double-digit percentage declines for North America’s West Coast and the 21st straight month in which the percentage change in volume at East and Gulf Coast ports had outperformed West Coast ports.

In B.C., meanwhile, container traffic through the Port of Prince Rupert’s Fairview Container Terminal, which is operated by Dubai-based DP World, dropped to 1.4 million 20-foot-equivalent units (TEUs) in 2022 from 1.6 million TEUs in 2021.

At the Port of Vancouver, mid-year 2022 numbers show container cargo volumes down seven per cent compared with the same time in 2021.

Vancouver’s full year cargo numbers for 2022 had not been released as of press time.

However, the Vancouver Fraser Port Authority (VFPA) acknowledged the increasing competition it faces from Mexican ports. The VFPA noted in an email response to BIV that the competition “underscores the importance of [its] work to build Canada’s trade competitiveness and supply chain resiliency.”

It pointed to the recent completion of the $350 million expansion at DP World’s Centerm container terminal as an example of projects aimed at maintaining that resiliency. Other initiatives cited by the VFPA include improvements to port road and rail links and digitization and optimization projects such as its West Coast Supply Chain Visibility Program. 

The VFPA is also awaiting a federal cabinet decision on its ambitious $3.2 billion Terminal 2 container cargo handling project at Roberts Bank.

At this point in the competition for transpacific cargo, Mexico’s star, backed by Chinese and Mexican state investment, is on the rise.

B.C.’s transpacific cargo playbook will need a significant upgrade to stay in the game.

Craig Fuller, founder and CEO of Freightwaves, underscored Canada’s cargo competition challenge during a freight market update panel discussion organized by the Tennessee-based global supply chain market intelligence company.

“One of the challenges in Canada – like the United States – is demographics … in terms of an aging population; [there is] not as much labour availability as you [have] in places like in Mexico and in Latin America,” Fuller said. “So, a lot of what we’re seeing in this shift from China is … lower cost of goods. And because it’s shifting from China, they’re going to naturally pick Mexico, which is a lower cost place.” 

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