China Factory Activity Decline Eases Again After Trade Truce
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China's factory activity improved for a second month but remained in contraction, as trade rebounds after the ceasefire in the tariff war with the US while weak domestic demand weighs on the economy.
The official manufacturing purchasing managers' index was 49.7 in June, versus 49.5 in the previous month, slightly exceeding the median estimate in a Bloomberg survey of analysts. A reading below 50 indicates contraction.
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USMCA considerations The third factor considered by the panel is the current trade agreement among the U.S., Mexico and Canada — the United States-Mexico-Canada Agreement (USMCA) — entered into in July 2020. The USMCA creates a favorable trade environment by, among other things, significantly reducing or eliminating tariffs on many goods and simplifying trade procedures. The relations between these three countries, however, are not without challenges. Near-term hurdles for North American nearshoring As noted by the nearshoring panel at FBT Connect™ Manufacturing, the USMCA will be renegotiated in the near future, with the current agreement providing that a joint review is required by July 2026 at the latest. In addition, although Canada and Mexico were largely spared from the reciprocal tariffs implemented by the U.S. government, certain tariffs have affected specific Mexican and Canadian products, including, for example, a 25% tariff on steel and aluminum imports. 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Further, Mexico and Canada have certain immutable advantages over many of their global counterparties — including geographical proximity, time zone alignment and fewer cultural and linguistic differences — that make investment attractive to U.S. companies and, in turn, incentivize the U.S. government to minimize barriers to North American trade. Opportunities for Mexico and Canada The nearshoring trend, and even the economic unrest resulting from ongoing tariff measures and countermeasures, present opportunities for Mexican- and Canadian-based companies. Manufacturers continue to explore moving production and warehousing activities to North America to reduce supply chain disruption and avoid higher tariffs. In light of these opportunities, both the Mexican and Canadian governments are becoming introspective in eliminating any internal barriers to trade and commerce, including improving infrastructure and boosting domestic consumption. In Mexico, for example, there is a new railroad being built to compete with the Panama Canal, and the government is exploring streamlining the tax code to create a more attractive place for manufacturing companies to do business. In Canada, policymakers, companies and consumers are promoting a 'Buy Canadian First' campaign to support Canadian businesses and strengthen the local economy. Additionally, Canada can attempt to present itself to other important trading partners, such as the European Union, as an arguably more reliable and stable trading partner than its neighbor to the immediate south, which could incentivize companies to move manufacturing to Canada. Key takeaways This final consideration and certain others may become less significant in the short term once the dust of this current tariff storm settles. But supply chain decisions, like where to invest in manufacturing facilities, are by their nature long term. Whatever the short-term outcome of this economic and geopolitical uncertainty, manufacturing, transportation and logistics stakeholders in the U.S., Mexico and Canada will continue to capitalize on the opportunities that have been presented to ensure that the nearshoring trend becomes an established and profitable economic reality. For more information or assistance navigating supply chain, global trade and tariff-related issues, please contact the authors or any attorney with the firm's Manufacturing Industry Team. Frost Brown Todd is a national law firm serving some of America's top corporations and emerging companies. With attorneys regularly identified by clients, peers and industry organizations as leaders in their practice areas, the firm advises and protects clients in business transactions and litigation in many industries, including insurance, financial services, manufacturing, real estate, construction, technology, energy and health care. The firm's more than 600 attorneys in offices across California, Colorado, Indiana, Kentucky, Ohio, Pennsylvania, Tennessee, Texas, Washington, D.C., and West Virginia provide unparalleled service to meet clients' needs; deliver the insights and solutions available only from a diverse group of professionals; and support the communities in which they operate.
