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Employees work on the assembly line of the Tiguan model, at the Volkswagen car plant in Puebla, central Mexico in 2018.

PEDRO PARDO | AFP | Getty Images

China and the United States are disrupting trade in much of world with their trade war — but Mexico may be a winner.

Despite fresh hopes among investors for a peaceful conclusion, the trade conflict that began between the world’s two biggest economies more than a year ago shows no substantive signs of ending.

But amid all the chaos, Mexico is coming out on top, said John Murphy, senior vice president for international policy at the U.S. Chamber of Commerce. Mexico, he said, has been able to build on its emergence as a manufacturing hub “with free-trade agreements that offer guaranteed access to more than 50 foreign countries.”

“Mexico has a number of key advantages in comparison to other cheaper labor options, predominantly in the Southeast Asian region, as a manufacturing and export platform,” Murphy outlined via email for CNBC.

  1. Mexico’s close proximity to the U.S. market and tariff-free access it enjoys with the United States
  2. A relatively minor cultural gap between the U.S. and Mexico that has improved drastically over the years
  3. Substantial degree of integration between the two countries:
    – 36 million Americans of Mexican descent 
    – hundreds of billions in annual bilateral trade
    – more than $100 billion in U.S. direct investment in Mexico
  4. Infrastructure connections domestically and cross-border that continue to improve

Much of the discussion about countries benefiting from the trade war has focused on smaller nations in Asia such as Vietnam, or other economies whose companies have shifted operations home from China.

This month, investment bank Nomura published a report that picked Mexico as a trade-war winner from outside Asia.

Nomura’s Sonal Varma and Michael Loo clarified that companies in most cases are not “completely shutting down their factories in China,” but “gradually moving a certain proportion of the production out of China.”

But at any rate, Nomura pointed out that Mexico has seen six new factories open between April 2018 and August 2019 in a range of sectors: electrical equipment, electronics, and automobiles and components.

US-Canada-Mexico trade deal

Mexico has always been a top destination for U.S. companies in search of cheaper labor. Mexico, the United States and Canada last year signed a new trade deal — the United States-Mexico-Canada Agreement, or USMCA — which is designed to replace NAFTA.

Trade in goods and services between the U.S. and Mexico totaled an estimated $671.0 billion in 2018, making it America’s third largest goods trading partner, according to the Office of the U.S. Trade Representative.

The U.S. goods trade deficit with Mexico was $81.5 billion in 2018, a 14.9% increase ($10.6 billion) over 2017, according to official data.

Among the 2018 top export list from Mexico to the U.S. machinery made up $46 billion, electrical machinery $43 billion, mineral fuels $34 billion, vehicles $22 billion, and plastics $18 billion, according to official data.

“Transition from NAFTA to USMCA will be smooth,” said Murphy of the U.S. Chamber, who predicted that “the future is bright for North American trade, regardless of what happens next in the U.S.-China trade talks.”

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Kudlow says a trade deal with China is ‘close’ amid ‘intense’ talks

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Larry Kudlow, White House National Economic Council director, said the U.S. and China are “close” to a trade deal but that the administration was prepared to walk away if it did not get the terms they wanted.

“The president has said many times if the deal is no good, if the assurances with respects to preventing future thefts, if the enforcement procedure is no good he has said we will not go for it. We will walk away,” Kudlow said on CNBC’s “Squawk on the Street” on Friday. “The president has said that if we can not get the enforcement and the assurances, then we will not go forward.”

The two countries are in talks to finalize a so-called phase one trade deal as 15% tariffs on $165 billion in Chinese imports are set to kick in Dec. 15. Kudlow said the two sides are moving closer to a deal.

“The deal is close. It’s probably even closer than in mid-November,” Kudlow said. “Deputy level met again … The reality is constructive talks, almost daily talks. We are in fact close…There’s no arbitrary deadlines, but the fact remains December 15 is a very important date with respect to a no go or go on tariffs.”

Kudlow characterized the recent talks between the world’s two largest economies as “intense.”

“I say intense because this is a very important matter,” Kudlow said. “There’s so much at stakes here when you go through the various categories… We can’t afford, we must not permit any country, China or whoever, to willy nilly steal our breakthroughs in technology and advanced micro-processing related to 5G.”

Trump said on Thursday that trade talks with Beijing were going “very well.” He added that something could happen regarding those tariffs that are set to be imposed in less than 10 days, but added they are not discussing that yet.

The Wall Street Journal reported on Thursday the U.S. and China still haven’t reached a consensus on the amount of agriculture goods that China would buy.

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Oil on track for weekly gain as OPEC+ set to confirm supply cut

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A truck used to carry sand for fracking is washed in a truck stop in Odessa, Texas.

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Oil prices fell on Friday, but were set for weekly gains ahead of the OPEC+ meeting which kicked off Friday in Vienna.

The Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia – a grouping known as OPEC+ – agreed on Thursday to more output cuts to avert oversupply as economic growth stagnates amid the U.S.-China trade war.

But OPEC stopped short of pledging action beyond March and analysts have questioned the impact of the latest curbs.

Brent futures were down 18 cents at $63.21, but are set to rise 1.5% on the week.

West Texas Intermediate oil futures fell 33 cents to $58.10 a barrel. They are set to rise nearly 6% on the week.

The cuts next year will expand the existing agreement by an extra 500,000 barrels per day (bpd) reduction in the first quarter next year, through tighter compliance and some adjustments. OPEC’s current agreement is a supply cut of 1.2 million bpd and the increased amount represents about 1.7% of global oil output.

“If we were to have an outcome of an extension of cuts with only the official quota of the OPEC+ group being reviewed lower (the 500,000 bpd), rather than actual production, then the change in supply policy would be cosmetic (given below target production in some countries, notably Saudi Arabia and Angola),” said Harry Tchilinguirian, global oil strategist at BNP Paribas.

OPEC is likely to shoulder 340,000 bpd in fresh cuts and non-OPEC producers an extra 160,000 bpd, one source said on Friday.

Any price gains from the OPEC+ output cut are likely to benefit American producers not party to any supply curbing agreement. American drillers have been breaking production records even as they cut the number of oil rigs in operation, filling gaps in global supplies.

“North American shale supply will continue growing even in an environment with lower oil prices,” Rystad Energy said in a note.

Higher oil prices are also supporting the initial public offering of Saudi Arabia’s state-owned oil company, Saudi Aramco, which priced its shares on Thursday at the top of an indicated range.

The sale was the world’s biggest initial public offering (IPO), beating Alibaba Group Holdings’ $25 billion listing in 2014, but fell short of a $2 trillion valuation for Aramco sought by Saudi Crown Prince Mohammed bin Salman.

Foreign investors stayed away and the sale was restricted to Saudi individuals and regional investors.

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266,000 payrolls added, 3.5% unemployment

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The jobs market turned in a stellar performance in November, with nonfarm payrolls surging by 266,000 and the unemployment rate falling to 3.5%, according to Labor Department numbers released Friday.

Those totals easily beat the Wall Street consensus. Economists surveyed by Dow Jones had been looking for solid job growth of 187,000 and saw the unemployment rate holding steady from October’s 3.6%.

The jobs growth was the best since January. While hopes already were up, much of that was based on the return of GM workers following a lengthy strike. That dynamic indeed boosted employment in motor vehicles and parts by 41,300, part of an overall 54,000 gain in manufacturing.

Stock market futures surged in reaction to the better-than-expected report. Bond yields also surged.

The vehicles and parts sector had fallen by 42,800 in October. However, the job gains were spread among a multitude of sectors. Health care added 45,000 positions after contributing just 12,000 in October.

Leisure and hospitality increased by 45,000 and professional and business services rose by 31,000; the two sectors respectively are up 219,000 and 278,000 over the past 12 months. Wage gains also were a touch better than expectations.

Average hourly earnings rose by 3.1% from a year ago, while the average work week held steady at 34.4 hours.

Economists had been looking for wage gains of 3%. A separate gauge of unemployment that includes discouraged workers and the underemployed declined as well, falling to 6.9%, one-tenth of a percentage point below October.

In addition to the robust November gains, revisions brought up totals from the two previous months. September’s estimate went up 13,000 to 193,000 and the initial October count increased by 28,000 to 156,000. Those changes added 41,000 to the previous tallies and brought the 2019 monthly average to 180,000, compared to 223,000 in 2018.

The U.S. economy needs to create about 107,000 jobs a month to keep the unemployment rate steady, according to calculations from the Atlanta Federal Reserve.

The unemployment rate of 3.5%, down from 3.6% in October, is back to the 2019 low and matches the lowest level of unemployment since 1969.

The news was not all good. As the holiday shopping season accelerated, retail companies added just 2,000 net hires as gains in general merchandise of 22,000 and motor vehicle and parts dealers of 8,000 were offset by an 18,000 loss in clothing and clothing accessories.

Mining also showed a loss of 7,000 positions, bringing to 19,000 the total jobs lost since May.

The strong jobs report comes amid a challenging year for the U.S. economy. Recession fears surged in late-summer amid worries that a global slowdown would spread to American shores. The back-and-forth lobbing of tariffs between the U.S. and China also raised fears of instability, and the bond market sent what has been a reliable recession indicator when short-term government yields rose above their longer-term counterparts. The Fed reacted by cutting its benchmark interest rate three times, part of what officials deemed insurance against a potential slowdown.

Those recession fears have ebbed recently, though, as consumer and business sentiment remains high, spending remains resilient and the stock market scales new highs.

The Fed meets next week, and officials have been clear that they plan no further rate changes unless conditions change significantly.

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