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.
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.
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.
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.
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.
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.
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.
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.
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.
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.