In 2018, US President Donald Trump started a trade war with China. Mexico benefited. Companies looking to avoid tariffs by diversifying production from China saw the country as a good option, thanks to its affordable workforce, good infrastructure and, most importantly, its free trade agreement with the United States.
As Mr. Trump approaches his second term, that logic has worsened. Chinese companies were paying more attention to Mexico than other companies. Their investment in the country has skyrocketed. Mr. Trump (who has already threatened to impose 25% tariffs on Mexican imports “on day one” if immigrants and drugs do not cross the border illegally) has said that these companies will send Mexico to the U.S. tariff-free. I believe that it is used as a gateway to the world. His conviction could lead to the collapse of the United States-Mexico-Canada Free Trade Agreement (USMCA).
Concerns about Chinese activities in Mexico are bipartisan and long-standing. In 2019, U.S. officials became concerned that Chinese exporters were simply using Mexico as a route to the U.S. market, especially for steel and aluminum. The issue has been primarily addressed by Mexico’s tariffs on metal imports from China and its “melt and pour” rules that require steel to be “substantively converted” in Mexico before being exported to the United States. Ta. Outright fraud, such as importing products from China, relabeling them as Made in Mexico, and exporting them to the United States, is probably rare.
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The focus now is on Chinese companies that assemble or manufacture products in Mexico for sale in the United States. A lot of these things are happening. In 2023, Mexico will overtake China and become the largest exporter to the United States. Meanwhile, exports from China to Mexico are rapidly increasing (see Figure 1). In 2002, exports from Mexico to the United States contained less than 5% Chinese content by value. By 2020, that number was 21%.
The production of electric vehicles (EVs) is a major challenge. Most EVs sold around the world are made in China, which typically costs less than those made by American companies and is of equal or better quality. In September, President Joe Biden raised tariffs on EV imports from China to 100%. Without them, sales would skyrocket. However, the tariffs do not apply to vehicles manufactured in Mexico.
President Trump falsely claims that Chinese automakers are building “monster” factories south of the border. Only one Chinese joint venture manufactures EVs for Mexico and regional markets. BYD, a major Chinese EV manufacturer, announced that it will build a factory in Mexico. Mexico plans to produce 150,000 cars a year, but that hasn’t happened yet. This month, small manufacturer Solaever announced it would build a factory in northern Mexico.
The areas where Chinese companies are actually expanding tend to be further down the supply chain. In 2018, eight Chinese auto parts manufacturers opened operations in Mexico, which will increase to at least 20 by the end of 2023. These companies also make trim, battery cases, and high-tech elements such as driver-assistance software. Many cars are manufactured in Mexico using Chinese-made parts, but to qualify for free trade, USMCA requirements that 75% of cars must be manufactured in Mexico, whether by Chinese companies or not. is met. But whether it’s legal or not doesn’t matter, says Joshua Meltzer of the Washington think tank Brookings. “Political tolerance[toward China]is declining. Anything that smells of China is viewed with suspicion. “China is the new Made in China,” said Jorge Guajardo, former Mexican ambassador to China.
Today, the free trade espoused by the USMCA is subordinated to concerns about China, said Enrique Dussel-Peters, who runs the Center for China-Mexico Studies at the National Autonomous University of Mexico. The issue is looming over a review of the agreement in 2026. Marco Rubio, Trump’s pick for secretary of state, warned in September of “China’s rampant exploitation of Mexico as an intermediary” and “manipulation of the USMCA.” Canadian politicians have proposed withdrawing Mexico from the USMCA and creating a bilateral free trade agreement.
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Mexican officials complain that the focus on Chinese investment in Mexico is hypocritical. China’s direct investment in Mexico is small compared to the billions of dollars China invests in the United States each year. However, while FDI from China is rapidly growing in Mexico, FDI to the United States is decreasing. It’s not surprising that Mexico’s official FDI statistics seem to underestimate Chinese investment by a factor of six, according to research firm Rhodium Group (see Exhibit 2). Research firm Rhodium Group found that a cumulative $13 billion has been invested since 2013. Mexico is paying. North American diplomats say it’s the price of being “slow to read the writing on the wall.”
Mexican President Claudia Sheinbaum also read this book. Desperate to please its neighbor to the north, her government has set up an agency to screen foreign investments to rival those in the United States and Canada. There are plans to replace imported Chinese-made parts with Mexican-made parts. Economy Secretary Marcelo Ebrard said Mexico needs to start manufacturing microchips and lithium batteries. Other policies pleasing to President Trump are also making steady progress. “Mexico wants to be on the same team as Canada and the United States,” said Luis Rosendo Gutiérrez, an official with Mexico’s Ministry of Economy.
But that debate is divorced from the reality of the complex nature of trade, Dussel-Peters says. Foreign companies in Mexico, primarily American companies, account for 70% of Mexico’s exports to the United States. U.S. automakers such as General Motors and Ford are among those integrating Chinese companies into their supply chains. Some encouraged Chinese suppliers to set up shop in Mexico.
Import substitution takes time and requires incentives. Mexico’s cash-strapped government cannot provide the kind of subsidies available to domestic production of U.S. chips and batteries. Additionally, some products cannot be sourced from outside China. Odracil Barquera of the Mexican Automotive Industry Association said, “The region has not yet established a supply chain for things like EV batteries.”
Meanwhile, Mexico has other reasons to worry. In the early 2000s, Japan lost out to China in exports to the United States. If Chinese companies now replace Mexican companies in North American supply chains, Mexico will suffer again, said Margaret Myers of the Inter-American Dialogue think tank in Washington. Here, U.S. and Mexican officials exchange views. “The message to the United States is, ‘How can we help you make what you’re importing from Asia?’ Because it helps us too,” Gutierrez said.
