Chinese Companies Are Taking Advantage of United States’ Nearshoring Strategy By Setting up Shop in Mexico

Although China accounts for only a small fraction of Mexico’s total Foreign Direct Investment, it has significantly expanded its portfolio in recent years.

Chinese companies are taking an increasing interest in setting up or expanding their operations in Mexico, as Washington escalates its trade war with Beijing. In 2022, Chinese foreign direct investment (FDI) in Mexico soared by 48% year over year, from $1.7 billion to $2.5 billion [1], according to the Monitor of Chinese Outbound Foreign Direct Investment (OFDI) in Latin America and the Caribbean 2023, published last week by the Center for China-Mexico Studies (Cechimex) at the National Autonomous University of Mexico.

This contrasts with a 6.7% annual drop in Chinese FDI across Latin America as a whole. Although China accounts for only a small fraction of Mexico’s total FDI (roughly 7% in 2022 based on LAC-China Network’s numbers, compared to the US’ 43%), it has significantly expanded its portfolio in recent years and is the fastest growing source of foreign investment in Mexico.

An Interesting But Delicate Position

The report indicates that Mexico has the third largest Chinese FDI footprint in the region, behind China’s fellow BRICS partner Brazil ($5.7 billion) and Argentina ($2.94 billion). This puts Mexico in an interesting — and somewhat delicate — position.

On the one hand, its economy is benefiting handsomely from North America’s nearshoring trend, which is seeing a wave of global companies relocate some or all of their operations from China and other parts of Asia to Mexico in order to serve the US market. Last year, it attracted $35.3 billion in FDI, its highest level since 2015. The sectors attracting most interest among companies relocating to Mexico include automotive assembly plants and suppliers, telecommunications, electronics, pharmacochemical and textile industries.

On the other hand, many of the companies relocating to Mexico are apparently Chinese. Alarmed by the recent shipping chaos caused by the COVID-19 pandemic and growing geopolitical fractures, they are hoping to skirt North American trade restrictions, including USMCA’s rules of origin, by setting up factories in Mexico, as the New York Times reported in February:

[D]ozens of major Chinese companies are aggressively investing in Mexico, taking advantage of an expansive trade deal with North America . Following a path forged by Japanese and South Korean companies, Chinese firms are setting up factories that allow them to label their products “Made in Mexico,” then truck them duty-free to the United States.

The interest of Chinese manufacturers in Mexico is part of a broader trend known as nearshoring or close relocation. International companies are moving production closer to customers to limit their vulnerability to transportation problems and geopolitical tensions.

The participation of Chinese companies in this change shows the deepening assumption that the divide between the United States and China will be a lasting feature of the next phase of globalization. However, it also reveals something fundamental: Beyond the political tensions, the trade forces that bind the United States and China are even more powerful.

The strategy of “nearshoring” in Mexico is nothing new. Countries like Japan and Germany have been manufacturing products like automobiles out of the U.S.’s southern neighbor for decades in order to gain immediate access to the States while benefiting from Mexico’s cheaper production costs. Traditionally, six foreign countries account for the lion’s share of investments in Mexico’s manufacturing industry, says José Ignacio Martínez, the coordinator of the Laboratory for Analysis of Commerce, Economy and Business (Lacen): the US, Spain, Germany, the UK, the Netherlands and China.

Taking Advantage of US-Mexico Tensions

Chinese investments in Mexico are on the rise despite a recent agreement by the governments of the US, Canada and Mexico to set up a committee for the substitution of imports to North America from Asia. At the tenth North American Leaders’ Summit (NALS), held in Mexico City in January, Raquel Buenrostro, called on the region to reduce imports from Asia and bolster the regional supply chain.

Since then Chinese companies have, if anything, intensified their investment push in Mexico. Just last week, China’s newly appointed ambassador to Mexico, Zhang Run, unveiled plans to resume direct flights with Mexico, in order to improve the two countries’ economic relationship and promote nearshoring projects. Direct flights between the two countries have been suspended since 2020 due to trade issues and the Covid-19 pandemic.

Needless to say, these overtures have not gone unnoticed by DC-based lawmakers and lobbyists.

“China increasingly sees opportunity in Mexico, and the investments are increasing,” Eric Farnsworth, vice president of the Council of the Americas, a business lobby group whose members include 200 blue chip companies representing the lion’s share of US private investment in Latin America, told Fox News [2]. “It’s convenient to try to circumvent sanctions … by going to Mexico and then producing in Mexico and then trying to get into the U.S. market.”

China’s ramping up of its commercial and investment activity with Mexico has raised concerns in the Washington beltway that Beijing may be seeking a financial and political upside as tensions between the US and Mexico rise over a whole raft of issues, from energy to GMO foods, to the fentanyl trade (which also involves China) and the Mexican government’s ongoing refusal to endorse sanctions against Russia. According to Farnsworth, the spike in Chinese investment boils down to two main contributing factors: Beijing’s attempts to bypass Washington’s sanctions and deteriorating relations between the U.S. and Mexico.

China’s Diplomatic Coups in Latin America

In recent months China has already pulled off a number of diplomatic coups in Latin America. It has begun to forge a more strategic relationship with fellow BRICS member Brazil. Meanwhile, South America’s second largest country, Argentina, has applied to join both the BRICS grouping and the BRICS’ New Development Bank. China has also signed partnership agreements with the governments of El Salvador and Honduras, both of which have severed diplomatic relations with Taiwan and recognised the existence of only one China in the world.

El Salvador, a country whose economy is totally dollarised and which is located slap bang in the US’ direct neighborhood, is also in the process of negotiating a free-trade agreement with China. China already has free trade deals with Chile, Peru and Costa Rica and is negotiating future agreements with five other Latin American states.

China’s rise in the region coincided almost perfectly with the US-led Global War on Terror. As Washington shifted its attention and resources away from its immediate neighborhood to the Middle East, where it frittered away trillions of dollars spreading mayhem and death and breeding new terrorists, China began snapping up Latin American resources. In just the first 20 years of this century, its trade with the region grew 26-fold, from $12 billion to $315 billion.

As a trading power, the US continues to hold sway over Central America, at least for now. And pound for pound, it is still Latin America and the Caribbean’s largest trading partner. But that is predominantly due to its huge trade flows with Mexico, which account for a whopping 71% of all US-LatAm trade. As Reuters reported in June, if you take Mexico out of the equation, China has already overtaken the US as Latin America’s largest trading partner. Excluding Mexico, total trade flows — i.e., imports and exports — between China and Latin America reached $247 billion last year, far in excess of the US’ $173 billion.

But China’s trade with Mexico is growing. According to El Economista, China provided close to 20% of all of Mexico’s imports in 2021, up from 15.3% a decade earlier. During the same period, the US’ share of Mexican imports has fallen from 50% to 44%. China’s share of Mexican imports could reach as high as 29% by 2035, according to some forecasts. The major products imported include telephones, LCD devices, computers, integrated electronic circuits, computer parts, auto parts, TV parts, and printed circuits.

It is a very different story when it comes to Mexican exports. The US is still by far the biggest buyer, accounting for a whopping 80% of all purchases. By contrast, China accounts for just 1.9%. But even this situation is likely to change in the coming years. According to Tatiana Prazeres, a former foreign trade secretary of Brazil and senior fellow at the University of International Business and Economics in Beijing, China’s share of Mexican exports could reach as high as 20% by 2035 while the US’ share is expected to fall.

In the meantime, China is increasing its investments in a whole different area of Mexico’s economy: infrastructure and transportation, particularly in the central and southern parts of the country. As José Ignacio Martínez told the online business news service BNAmericas, Chinese companies and banks have invested in bus lines in Queretero, Guanajuato, Chihuahua, Nuevo León and Chiapas; in subway lines in Monterrey and Mexico City; in the semi-fast Mayan train project (with projected maximum speeds of 200 km/h); in renewable energy projects in the south of the country; and in Pemex’s new Dos Bocas refinery in Tabasco. Chinese companies have also invested in ports in Baja California, Colima, Michoacan and Veracruz.

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[1] This is roughly ten times higher than the amount registered by Mexico’s Economy Ministry for 2022. The huge difference is explained by the very different methodologies used, says Enrique Dussel, economist, researcher and coordinator of the Center for China-Mexico Studies (Cechimex) at the National Autonomous University of Mexico. Chinese companies often use their subsidiaries in other countries, such as the US, to make capital investments in Mexico. For Mexico’s Ministry of Economy, this counts as a US investment. For Cechimex, it is Chinese.

[2] The Council of the Americas was founded in 1963 by David Rockefeller as a means of combating the influence of Fidel Castro in Latin America. The Kennedy administration awarded US companies investment guarantees, which by 1967 would set the government back $600 million in the case of Chile alone. As Wikipedia notes, the Council hosts presidents, cabinet ministers, central bankers, government officials, and leading experts in economics, politics, business, and finance. It asserts that free markets and private enterprise offer the most effective means to achieve regional economic growth and was instrumental in the conception of the North American Free Trade Agreement (NAFTA) and the Central American Free Trade Agreement (CAFTA).