Mexico in U.S. Supply Chains: Lessons from 2018-19 Tariffs

June 05, 2026

Mexico in U.S. Supply Chains: Lessons from 2018-19 Tariffs

Maria Aristizabal-Ramirez, Chris A. Avalos, Emma Rosenbaum, and Eva Van Leemput¹

In the wake of the 2018-19 U.S.-China tariff hikes, there has been a significant shift in U.S. supply chains, with Mexico emerging as the largest supplier of U.S. imports, surpassing China. This shift has been attributed in part to Mexico gaining a cost advantage over China following the U.S tariffs on China. However, there is ongoing debate about the extent to which Mexico's rising exports to the U.S. reflects genuine gains in competitiveness by Mexican firms versus an alternative explanation: that China is using Mexico as a "backdoor" by relocating production there or transshipping goods to circumvent tariffs.

Distinguishing between these different forms of trade diversion is important. If a large share of diversion to Mexico reflects the relocation of Chinese production, U.S. efforts to decouple from China-for national security, supply chain resilience, and other reasons-may be undermined. Moreover, if many goods are transshipped, the U.S. could lose significant tariff revenue.

Our key contribution is developing a unified decomposition framework that quantifies the relative magnitudes of Mexico's export gains across different sources: trend growth, trade diversion unrelated to China, China's backdoor strategies (separating transshipment from production), and other factors. Critically, we are the first to systematically quantify China's total role-both transshipment and production relocation-relative to other sources of trade diversion, providing bounds essential for evaluating decoupling policy effectiveness. We contribute to the literature on supply chain restructuring in response to trade policy, specifically examining the reconfiguration of trade relationships among the U.S., Mexico, and China following the 2018-19 Trade War (Alfaro and Chor, 2025; Arizala et al., 2025; Bonadio et al., 2025; Chen et al., 2025; Freund, 2025; Utar et al.,2025; Grossman et al., 2024; Dang et al., 2023; Freund et al., 2024).

We estimate that a substantial share of Mexico's gains in the U.S. market-approximately 53%-was driven by U.S. tariffs on China, highlighting the important role of tariff policy in redirecting trade flows. Of this increase, about one-quarter (14 percentage points) appears to reflect Chinese "backdoor" strategies, suggesting that a notable portion, but not most, of Mexico's export growth to the U.S. may be linked to Chinese production.

Overall, these findings indicate that higher U.S. tariffs not only induce trade diversion but also encourage firms to relocate production to lower-tariff countries. With broader U.S. tariffs in place since 2025, both genuine supply chain realignment and backdoor activity are likely to intensify.

1. U.S.-China Tariffs Shifted Trade to Mexico and Boosted China-Mexico Ties

In the aftermath of the 2018-19 U.S.-China tariff hikes, Mexico has emerged as the largest supplier of U.S. imports, surpassing China and now accounting for 16% of total imports (Figure 1a). This shift has been attributed in part to Mexico gaining a cost advantage over China following the U.S tariffs on China.² Figure 1b presents the evolution of Mexican exports of goods for which U.S. imposed tariffs on China in 2018-19, labelled "China tariffed," with those that were not tariffed, the dashed black line. Mexican tariff-exposed exports outperformed, suggesting sizable trade diversion to Mexico.

However, concurrent with Mexico's export surge to the U.S., Chinese engagement with Mexico intensified. Figure 2a shows that Chinese greenfield foreign direct investment (FDI) into Mexico surged across many manufacturing sectors, while Figure 2b shows a parallel surge in Mexican imports from China in these same sectors. These patterns suggest Chinese firms may be using Mexico as a platform to access U.S. markets-either through transshipment or outright production relocation.³

2. Quantitative Analysis

2.1 How Much Did Mexico's Export Gains to the U.S. Reflect Trade Diversion?
Our analysis first isolates the share of Mexico's export growth to the U.S. following the U.S.-China tariff hikes that is attributable to trade diversion. To do so, we use variation in Mexico's exports of goods for which U.S. imposed tariffs on China and distinguish these effects from underlying trends and other factors. We proceed in two steps.

Step 1: Measuring Total Change and Trend

We first compute the total change in Mexican exports for each good between the pre-tariff period (2014-17) and the post-tariff period (2021-24). We then estimate what exports would have been absent the tariff shock by projecting pre-tariff trends forward using an HP filter.⁴ The trend component captures the expected growth in Mexican exports based solely on the continuation of pre-policy patterns.

Step 2: Estimating Trade Diversion

To identify tariff-driven trade diversion, we compare how Mexican exports of goods for which the U.S. imposed tariffs on China evolved relative to non-tariffed goods.⁵ The key insight is that products where China had a larger initial presence in the U.S. market were hit harder by tariffs, creating stronger incentives for trade diversion to Mexico. We control for product-specific pre-tariff growth trends to isolate the policy effect from pre-existing demand or productivity changes

Figure 3 presents the decomposition. We find that trade diversion accounts for 53% of Mexico's export gains to the U.S. during this period, while trend growth accounts for 35%, and other factors, such as the post-pandemic demand for autos, account for the remaining 12%. Hence, our results show that Mexico's export gains to the U.S. were notably driven by higher U.S. tariffs on China.

2.2 To What Extent Did China Use Mexico as a "Backdoor" to Access the U.S.?

Next, we capture the portion of trade diversion that is attributable to China's use of Mexico as a backdoor.

Step 3: Identifying China's Backdoor Use

We use a similar regression framework, now focusing on Mexican imports from China of U.S. tariffed versus non-tariffed goods. For tariffed goods, we interpret increases in Mexican imports from China as reflecting efforts to access the U.S. market-either through transshipment or production relocation. This interpretation is supported by the fact that the increases are concentrated in products where China lost U.S. market access, suggesting they primarily serve U.S. demand rather than Mexican domestic consumption.

Step 4: Distinguishing Transshipment from Production Relocation

Among goods identified as part of China's backdoor usage, we classify transshipped products as those tariffed goods imported from China and then re-exported to the U.S.⁶ Products that do not fall under this definition are classified as involving meaningful production in Mexico.

Figure 4 further decomposes our earlier estimate of trade diversion. We find that direct transshipment from China is negligible, accounting for less than 1 percentage point. Hence, contrary to concerns about China simply transshipping goods through Mexico, the trade data do not appear to support large-scale transshipment.⁷ We further corroborate this result using additional input-output data for Mexican exports to the U.S. Figure 5 shows that Mexican value-added growth in exports to the U.S. exceeded Chinese input growth during this period, indicating that Mexican exports incorporated substantial domestic content alongside Chinese inputs. This pattern would not emerge if Mexico were merely transshipping Chinese goods with minimal processing. All told, the evidence does not support large-scale transshipment.

Instead, the trade data are more consistent with some form of Chinese production or processing in Mexico, accounting for 14 percent of Mexico's total export gains to the U.S. This could range from substantial manufacturing operations to more limited processing activities, but in either case reflects a clear Chinese footprint beyond pure transshipment. The remaining 38 percent reflects diversion from sources other than China, including Mexican firms as well as expansion of U.S. and other foreign multinationals in Mexico, consistent with patterns documented in Utar et al. (2025, 2026).

Note that we identify China's use of Mexico as a "backdoor" through international trade data, as we do not have access to more direct information on firm ownership. As a result, our estimates are subject to important caveats and should be interpreted as informative bounds rather than precise measures.

Our framework may overstate China's backdoor role if non-Chinese firms increased their reliance on Chinese inputs to serve the U.S. market, or if some Chinese imports to Mexico are destined for domestic consumption rather than re-export (though supplementary evidence shows Chinese FDI is positively correlated with Mexican exports to the U.S.). Conversely, we may understate China's role by focusing only on tariffed goods-if Chinese firms rely on non-tariffed inputs in Mexican production, this activity would not be captured.

3. Implications for Today and USMCA Renegotiations

The 2018-19 episode provides a useful benchmark for understanding the current environment. With a new wave of tariffs now underway and the USMCA review approaching in July 2026, a key question is whether these patterns will repeat or intensify.

Looking forward, two key differences suggest trade diversion could exceed 2018-19 levels. First, tariffs are even higher this time while remaining relatively low on Mexico, amplifying the cost advantage that drove trade diversion to Mexico previously. Second, tariffs are now broader, covering more countries and products. This increases incentives not only for China but for firms from multiple countries to use Mexico as a backdoor. Moreover, if firms now view tariffs as more permanent, supply chain adjustments may occur faster or may have already taken place in anticipation.

These dynamics are already evident in the electronics sector. FDI from Asian countries excluding China has surged in recent years, while existing contract manufacturers like Taiwan's Foxconn have expanded their Mexican operations (Figure 6.A). This helps explain Mexico's surprisingly rapid gains from the U.S. AI boom-Mexico has emerged as a top supplier of AI-related goods to the U.S. market (Figure 6.B).

The upcoming USMCA review will shape whether policy emphasizes deeper integration or tighter restrictions on non-North American content. Given substantial trade diversion and highly integrated supply chains-Mexico accounts for 16% of U.S. imports-this policy direction carries important implications. Stricter rules of origin could disrupt supply chains if they fail to distinguish transshipment from genuine relocation, while maintaining current rules may allow backdoor strategies to expand.

Conclusion

The 2018-19 U.S.-China tariffs reshaped U.S. trade not only with China but also with third countries-most notably Mexico, which benefited from substantial trade diversion. At the same time, U.S. tariff on China incentivized Chinese firms to relocate production to Mexico. We estimate this channel is economically meaningful, accounting for about 14 percent of Mexico's total export gains to the U.S. The majority of the remaining trade diversion, however, represents expansion by sources other than China, including Mexican firms as well as U.S. and other foreign multinationals operating in Mexico (Utar et al. 2025, 2026)

These findings highlight the complexity of modern supply chains and firms' relocation decisions and suggest that reductions in U.S. reliance on China may be overstated when production shifts indirectly through third countries. With tariffs now even higher and broader, these incentives may strengthen, potentially prompting firms from multiple countries to adopt similar strategies. Against this backdrop, the upcoming USMCA review will be important in shaping the direction of U.S. trade policy toward Mexico and its broader global trading partners.

References

Alfaro, Laura, and Davin Chor (2025). "An Anatomy of the Great Reallocation in US Supply Chain Trade," NBER Working Paper 34490.

Arizala, Francisco, Tomohide Mineyama, and Hugo Tuesta (2025). " Relocation of Global Value Chains: The Role of Mexico," IMF Working Paper WP/25/180.

Bonadio, Barthélémy, Zhen Huo, Elliot Kang, Andrei A. Levchenko, Nitya Pandalai-Nayar, Hiroshi Toma, and Petia Topalova (2025). "Playing with blocs: Quantifying decoupling," Journal of International Economics, https://doi.org/10.1016/j.jinteco.2025.104204.

Bonadio, Barthélémy, Andrei A. Levchenko, and Nitya Pandalai-Nayar (2026). "Falling Dominoes? The Impact of the US Exit from Free Trade on the Sustainability of Trade Cooperation," NBER Chapters.

Chen, Natalie, Dennis Novy, and Diego Solórzano (2025). "Trade Diversion and Labor Market Outcomes," CESifo Working Paper.

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Freund, Caroline, Aaditya Mattoo, Alen Mulabdic, and Michele Ruta (2024). "Is US trade policy reshaping global supply chains?," Journal of International Economics, https://doi.org/10.1016/j.jinteco.2024.104011

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Appendix

A.1 Data
Our main data source is UN Comtrade (2014-2024), which provides monthly bilateral trade flows at the HS 6-digit level (rev4) between the U.S., China, and Mexico. This data allows us to quantify the size of trade diversion. We complement our results using sectoral FDI flows to Mexico by country of origin (2014-2024) from fDi Markets, which capture greenfield investment and measure Chinese and other foreign presence in Mexico, and OECD Input-Output Tables (2014-2022, ISIC-2 rev4), which allow us to measure domestic and Chinese value added in Mexican exports to the U.S. We harmonize products into broad sectors for analysis.

A.2 Definitions
We define trade diversion as the increase in U.S. imports from Mexico that occurred because China faced higher tariffs, making Mexico more cost competitive. This diversion can take two forms: (1) Substitution toward Mexico: Mexican firms or existing non-Chinese operations in Mexico become more competitive relative to China. (2) China's backdoor strategy: China circumvents tariffs by routing goods through Mexico, either through (a) transshipment-shipping Chinese-produced goods via Mexico with minimal processing-or (b) production in Mexico by Chinese-owned firms or using substantial Chinese inputs. Distinguishing between these channels is critical for policy. If trade diversion largely reflects relocated Chinese production or transshipment, U.S. decoupling efforts may be weakened and tariff revenue reduced.