Big Debates: Who Will Be the Trade Winners Under Trump?

Summary

Thoughts on the Market: Big Debates - Who Will Be the Trade Winners Under Trump?

Released on January 31, 2025, by Morgan Stanley, "Thoughts on the Market" offers insightful analysis on recent market events. In this episode titled "Big Debates: Who Will Be the Trade Winners Under Trump?", hosts and strategists delve into the complexities of the US-Mexico trade relationship, reshoring, and nearshoring trends.

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Introduction

Michelle Weaver, Morgan Stanley's US Thematic and Equity Strategist, opens the discussion by setting the stage for a comprehensive debate on the US-Mexico trade dynamics influenced by the Trump administration's policies. Joined by Chris Snyder, US Multi-Industry Analyst, and Nick Lippmann, Chief Latin America Equity Strategist, the episode explores the ramifications of tariffs, supply chain disruptions, and strategic shifts in manufacturing locations.

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The Impact of Trump's Tariffs on US Reshoring

Michelle Weaver initiates the conversation by highlighting the significant strain tariffs imposed in 2018 during the first Trump administration had on global supply chains. These tariffs, coupled with the COVID-19 pandemic, acted as catalysts for reshoring—the process of bringing manufacturing and services back to the United States.

Chris Snyder provides a historical perspective, noting that while the US began ceding manufacturing share to countries like China over the past 25 years, the current reshoring movement is in its nascent stages:

"I think it's in the very early innings. If you look at the history of US manufacturing... the process of taking share back is probably slower and ultimately is a multi-decade opportunity."
[00:51]

Snyder emphasizes that the reshoring trend is not merely about relocating existing factories but involves adding new capacity to meet growing demands. He quantifies this opportunity at a substantial $10 trillion, encompassing both capital expenditures and future production potential.

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Trade Policies and Future Outlook

Michelle probes into the sustainability of the reshoring momentum post-pandemic, questioning whether upcoming trade policies will continue to bolster this trend.

Chris Snyder responds affirmatively, asserting that a Trump presidency is likely to prolong reshoring through protectionist measures:

"A Trump presidency absolutely adds duration to this theme via protectionism or tariffs that the administration will implement."
[03:18]

He highlights the unique leverage the US holds as the largest global demand region, constituting about 30% of global goods consumption. This dominance ensures that even with increased costs, the US market remains attractive for manufacturers seeking robust demand and favorable margins.

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Technological Advancements as a Reshoring Driver

The conversation shifts to other catalysts beyond tariffs that are fueling reshoring. Chris Snyder identifies technological diffusion, particularly advancements in automation and Gen AI, as critical structural tailwinds:

"Over time we will continue to figure out ways to squeeze labor out of the manufacturing cost profile... we will see that that's a structural tailwind for the United States given the high labor costs."
[04:47]

These technologies are expected to narrow the cost disparities between high-cost regions like the US and traditionally low-cost manufacturing hubs, making domestic production more competitive.

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Mexico's Strategic Position in US Trade

Transitioning to the US-Mexico trade relationship, Nick Lippmann offers a nuanced perspective on Mexico's potential as a significant trade winner under Trump's agenda. Contrary to prevalent market skepticism, Lippmann contends that Mexico stands to benefit substantially:

"We recently upgraded Mexico to equal weight from underweight... it's a much more constructive message. It's a very young deal."
[05:42]

He underscores Mexico's advantages in regional integration and the complexity for the US to simultaneously reduce dependence on both China and Mexico. Lippmann argues that Mexico's role as an integrated part of the manufacturing value chain, rather than just an assembly hub for Chinese firms, positions it favorably in the evolving trade landscape.

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Mexico as a Bridge or Buffer to China

Michelle raises a critical question about Mexico's dual role as a potential bridge to China or a buffer against it. Nick Lippmann addresses this by distinguishing between the perspectives of American and Chinese companies:

"American companies... view Mexico as an integrated part of the manufacturing value chain. Chinese companies view Mexico much more as a place of assembly."
[07:05]

He highlights the increasing trade deficits Mexico has with China and the US, suggesting a deeper integration that transcends mere assembly operations. This dual relationship requires Mexico to calibrate its trade policies carefully to balance its engagements with both the US and China.

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The Future of Nearshoring in Mexico

Looking ahead, the discussion turns to the evolution of nearshoring strategies in Mexico. Nick Lippmann reflects on past predictions and current developments:

"We laid out in 2022 this hypothesis that onshoring nearshoring was about to happen... It was going to happen slower, much like what Chris laid out, but it's going to be much more impactful."
[08:42]

He anticipates that while the pace of nearshoring might be gradual, the impact will be significant, especially with emerging manufacturing ecosystems in areas like EV batteries and IT hardware. Lippmann notes the importance of aligning policy objectives with these strategic sectors to bolster Mexico's manufacturing capabilities further.

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Conclusion

The episode concludes with a consensus on the transformative potential of trade policies under the Trump administration in reshaping the US-Mexico economic landscape. While reshoring offers a multi-decade opportunity for the US to reclaim manufacturing share, Mexico emerges as a pivotal player poised to capitalize on its strategic advantages. Technological advancements and regional integration are set to redefine manufacturing paradigms, making this a critical period for investors and policymakers alike.

Michelle Weaver wraps up by encouraging listeners to engage with the podcast and stay informed on these dynamic trade debates shaping the market.

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For those interested in the intersection of trade policies, manufacturing trends, and regional economic shifts, this episode of "Thoughts on the Market" provides a comprehensive and insightful analysis.

Transcript

[Michelle Weaver]

Welcome to Thoughts on the Market. I'm Michelle Weaver, US Thematic and Equity Strategist at Morgan Stanley.

[Chris Snyder]

I'm Chris Snyder, US Multi Industry Analyst.

[Nick Lippmann]

And I'm Nick Lippmann, Chief Latin America Equity Strategist.

[Michelle Weaver]

On this episode of our special miniseries covering big debates, we'll talk about the US Mexico trade relationship and the key issues around reshoring and nearshoring. It's Friday, January 31st at 10am in New York. The imposition of tariffs back in 2018 under the first Trump administration and the COVID pandemic put a severe strain on global supply chains and catalyzed reshoring and nearshoring in North America. But with inflation and supply chain concerns no longer front and center, investors are questioning whether the US Reshoring momentum can continue. Chris, what's your view here?

[Chris Snyder]

I think it's in the very early innings. If you look at the history of US manufacturing. The country really started seeding share in about 2000 when China joined the World Trade Organization. It's been going on for 25 years. We've been giving share back to the world. I think the process of taking share back is probably slower and ultimately is a multi decade opportunity. But you're absolutely right, the supply chain concerns are no longer like they were three to four years ago. But what I think has persevered since the pandemic is this heightened focus on operational durability and resiliency and really shortening supply chains and getting closer to the end user, which I'm sure we'll hear more from Nick about on the Mexico side. But if you look back at global supply chains and manufacturing, it's really been a chase to find low cost labor for the last 45 years. While that's always important, we think going forward capital and proximity to end users will increasingly dictate that regional allocation of CapEx. Those parameters are very supportive for the U.S. one thing I would like to make sure is known on our US reshoring view is that oftentimes it's thought of that we're shutting down a factory in China and reopening the same factory in the United States. That's really a very rare example. Our view is that the world and very specific industries need to add capacity. We just simply think that the US is better positioned to get that incremental factory relative to any point in the last 45 years due to the combination of structural tech diffusion, but also this focus on resiliency. One thing that I really do think is underappreciated is that Global manufacturing grows 4 to 5% a year. In the US it's been more in the 1 to 2% range because we're constantly ceding share. But even if the US just stops giving back share, you could see the growth profile of US industrials double.

[Michelle Weaver]

How would you size the reshoring opportunity? Do you have a dollar amount on what that could be worth?

[Chris Snyder]

Yeah, we've sized it at $10 trillion and it's been a combination of the CapEx, the fixed asset investment that's needed to build these factories, then ultimately the production opportunity that will come to those factories thereafter.

[Michelle Weaver]

And you've argued that the US reshoring flame was really lit in 2018 with the first wave of the Trump tariffs. It seems clear that trade policies by the new administration will continue to support reshoring While. What's your outlook there?

[Chris Snyder]

Yeah, you're absolutely right. Prior to 2018, there wasn't really a thought process. If you needed an incremental factory, you most likely just put it in China. I think the tariffs back in 2018 or 19 really started or kick started boardroom conversations around global supply chains. I think a Trump presidency absolutely adds duration to this theme via protectionism or tariffs that the administration will implement. If you go back to the Trump 1.0 tariffs, supply chains reacted to the change in cost structures very quickly. We didn't see a huge wave of investment back into the United States. We just saw production exit China and move to broader Asia because the focus was tariff avoidance. Now we think the focus is around building operational resiliency and durability which better positions the US to get that incremental factory. One thing that I think is underappreciated here is just how much leverage U.S. politicians have. The U.S. is the best demand region in the world. The U.S. accounts for about 30% of global goods consumption. That's equal to the EU and China combined. It's also the best margin region in the world, not only for US companies, but most international companies do their best margins in the United States. You can raise the cost to serve the US market and no one is turning away from the region that has the best demand and the best margins.

[Michelle Weaver]

So of course tariffs in the pandemic have been major catalysts for US Reshoring. Have there been any other drivers like tech diffusion?

[Chris Snyder]

Yeah, I view the pandemic as the catalyst and I view tech diffusion as the structural tailwind for US manufacturing. Over time we will continue to figure out ways to squeeze labor out of the manufacturing cost profile. It's hard to kind of pinpoint it. But I think if we look out over any five or ten year window, we will see that that's a structural tailwind for the United States given the high labor costs. Really what it will help do is just narrow the cost delta between low cost producing regions. I also think as we extend this tech diffusion into Gen AI, I also think what's going on will fuel another round of protectionism, further keeping that cycle going.

[Michelle Weaver]

Nick, of course the big question investors are asking is how will the Trump trade agenda impact Mexico contrary to the prevailing market view? You've argued that Mexico can actually win big with Trump. How's this possible?

[Nick Lippmann]

That's right, Michel. Look, we recently upgraded Mexico to equal weight from underweight. And while some of the news we see around the administration seems a bit like a sequel, there are other things that are just very different. We're not talking about ripping apart the USMCA, but actually bringing forward renegotiations from 26 to 25. It's a much more constructive message. It's a very young deal. And yet I think the world we live in today is quite different from the world of 2018. When we look at what are some of the things where Mexico could actually end up winning big, we look at the regionalism that appears to be a number one agenda. We look at how difficult it would be for the United States to de risk from China and from Mexico simultaneously. And also fundamentally that integration across the board of industrial integration. It's clear that there's a need for calibration. There's a need for calibration in terms of a lot of the trade policy. There's been talks about maybe a customs union and I think that's far out in the future. But there's a need to try to figure out how to calibrate trade. And also there are things that Mexican policymakers can do to deal with the non trade related issues such as immigration or the cartels. And I think frankly it's in Mexico's interest to deal with some of these issues.

[Michelle Weaver]

Where are we in the whole Mexico as a China bridge versus China buffer debate?

[Nick Lippmann]

Right. That's another good question, Michel. And one thing that we've been writing a lot about, the key difference from where we were in Trump 1 and now is just how different the relationship with China really is. And I think one area where we've been scratching our head a little bit with regards to how Mexican policymakers have reacted after signing the USMCA deal is really just around that, that relationship with China, where I think they might have misread or underestimated just how much times have changed. We've seen a big increase in import from China. There have been very specific manufacturing ecosystems. And we've also seen increased investments by China and Mexico. Now this has caused Mexico's trade deficit with China to go up a lot, almost double. And we've also seen increase in the trade deficit between Mexico and the United States in Mexico's favor. Now, that could imply that it's all the China bridge. I think that's far from the truth, but Mexico is probably 2 3rd or a little more above. It's really that integration that I think policymakers in Mexico need to understand. And then you need to manage these emerging elements of being a bridge. This is not in Mexico's interest. It's not in the US interest to simply just be a bridge. We have done a lot of surveys with corporates around the world and the way the European and American companies in particular view Mexico is completely different from the way Asian and in particular Chinese companies view Mexico. The Chinese companies view Mexico much more as a place of assembly, whereas Americans think of Mexico as an integrated part of the manufacturing value chain.

[Michelle Weaver]

Finally, how will the Mexico nearshoring theme develop from here?

[Nick Lippmann]

This is a great debate, I think, and one that's going to. I think we're going to be writing a lot with Pris about and with you guys about. Also with the US policy team. We laid out in 2022 this hypothesis that onshoring near shoring was about to happen. In terms of Mexico, it would imply $150 billion over five years. And very importantly, it was going to be. It could happen so fast because it was brownfield. It was more to the same. When you already had manufacturing ecosystems, you could add to that. We saw very little evidence that you could do Greenfield. But now that the world has evolved, we are looking at some of these Greenfield manufacturing ecosystems that are really not present in North America, not in the United States, not in Canada, not in Mexic, such as EV batteries or IT hardware. Some of the things that are starting to emerge around the big chip investments. And we're wondering what are going to be the policy objectives pertaining to these very specific manufacturing ecosystems that in many cases are quite important for national security. If that is to happen. I think it's going to happen slower, much like what Chris laid out, but it's going to be much more impactful. I'm sure we're going to be working closely on these debates next.

[Michelle Weaver]

Chris, thank you for taking the time to talk and to our listeners. Thanks for listening. If you enjoy thoughts on the market, please leave us a review wherever you listen to the show and share the podcast with a friend or colleague today. The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for.