Mexican Economy Faces Its “With U.S. Or Against U.S.” Moment

“What the US is really interested in is ‘security shoring,’ not nearshoring,” as it begins to place national security concerns above all other considerations in its relationship with China. 

This week, Mexico’s government announced hundreds of “temporary” tariffs on imports from countries with whom it does not have a trade agreement. The tariffs have been imposed on 544 imported products, including footwear, wood, plastic, electrical material, musical instruments, furniture, and steel, and range from 5% to 50% in size. They have one clear target in mind: imports from China, Mexico’s second largest trade partner, though the word “China” is not mentioned once in the decree.

The latest round of tariffs — which took effect on Tuesday — will apply for two years. They come on the heels of a package of tariffs imposed by the Economy Ministry last month on steel nails and steel balls from China. Mexico’s Economy Minister Raquel Buenrostro, speaking at a Council of the Americas event in Mexico City, said the tariffs were necessary to “prevent unfair competition”:

“We have seen a lot of products coming [into the country] … at a very low price and displacing our national producers… The prices for the public don’t go down, but [cheap imports] are displacing textile makers, footwear makers [and other manufacturers].

The move has received plaudits from some Mexican industry bigwigs. The president of the Confederation of Industrial Chambers of the United Mexican States, Alejandro Malagón Barragán, said the move was necessary “to provide fair market conditions to domestic industrial sectors that face situations of vulnerability, especially in the face of the serious non-oil trade deficit with China, which in 2023 reached $104 billion.” The tariffs, he said “are not a protectionist measure, but are necessary to create a level playing field, since they combat unfair practices such as dumping and subsidies that have seriously harmed Mexican companies.”

But while protecting domestic industries may be one of the many reasons behind this fresh raft of tariffs, the main reason is to assuage Washington’s concerns about Chinese companies taking advantage of its nearshoring strategy by setting up shop in Mexico. As the decree itself notes “due to the growing implementation of new trade models at the global level, such as the case of relocation (nearshoring), … it is necessary to implement concrete actions that allow a balanced interaction in the market, to avoid economic distortions that could affect the relocation of productive sectors that are considered strategic for the country.”

Mexico’s imports from China in the first two months of this year alone totaled $19.6 billion, accounting for roughly one-fifth of all of Mexico’s imports, according to El Financiero. That’s up from around 15% in 2015. During the same period, the US’ share of Mexican imports has fallen from 50% to 44%, even as the US and Mexico last year became each other’s largest trade partner, for the first time in 20 years.

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. Real world data suggest that one possible effect of US tariffs on Chinese goods is that many of the countries that saw faster export growth to the US in strategic sectors also had more intense intra-industry trade with China in those same sectors. In other words, as we’ve seen in Mexico, US dependence on Chinese goods is simply being displaced further down the supply chain.

A High-Risk Strategic Foothold

As I noted in a piece a year ago, the recent surge in trade and investment with China gives Mexico an obvious strategic foothold between the world’s two economic superpowers, but it is not without risk, especially as Washington begins to place national security concerns above all other considerations in its relationship with China:

On the one hand, [Mexico’s] 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.

As I noted in that article, China’s overtures toward Mexico 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.

Steel, EVs and Fentanyl

Since then, the US government has escalated its war of words against both China and Mexico over the illicit fentanyl trade that is killing tens of thousands of US citizens a year. It has also been pressuring Mexico to prevent China from selling its steel to the U.S. through its southern neighbor, and has even threatened to impose tariffs on Mexican steel if it doesn’t take tough enough action.

The latest cause of friction has been the growing presence of Chinese carmakers in Mexico. Over the past three years brands such as Changan, JMC, Chirey, Jaecoo and Jetour have set up operations in Mexico. BYD, China’s — and now the world’s — largest EV manufacturer, currently has six dealerships in Mexico, but it plans to have 50 (with a presence in all of Mexico’s 32 states) by the end of this year. BYD Americas CEO Stella Li recently told Reuters the company was looking to build a plant in Mexico with a production capacity of 150,000 units annually.

Suffice to say, that did not go down well in the US. A White House spokesperson said the Biden administration will not allow Chinese automakers to flood the market with vehicles that “pose a threat to national security.” According to a recent article in the Mexican newspaper Reforma, citing three unnamed Mexican officials, the Mexican government, under sustained pressure from the US, is keeping  Chinese automakers at bay by refusing to offer them incentives, such as low-cost public land or lower taxes, for investments in electric vehicle production. The officials also said they would suspend any future meetings with Chinese automakers.

The growing deployment of protectionist measures in Mexico, largely at the behest of the US, has elicited rare criticism in the Mexican business press. The online financial newspaper Expansión.mx featured a fiery op-ed from Jonathan Torres, a former editorial director for Forbes Media LatAm, titled “US to Mexico: You’re Against China or Against Me”:

Since 2022, US officials Janet Yellen (Treasury Secretary), Jake Sullivan (National Security Advisor) and Katherine Tai (Trade Representative) have repeatedly reiterated that the China threat is one of the most delicate risks in their national security strategy, so much so that they have deployed a range of measures to prevent Chinese investments from entering their territory, including through their trading partners. Reading between the lines, the message is blunt: “you are with me in my strategy against China or, otherwise, you will suffer consequences in terms of trade, investment, etc.”

The United States, given these circumstances, is not necessarily looking at the nearshoring phenomenon in the same way as the rest of the world… For the Biden administration, global supply chains are strategic but only under certain conditions; that is, as long as they do not threaten US national security. In other words, what the US is really interested is “security shoring,” not nearshoring.

The irony is stark: the superpower famed for its promotion of the (NC: so called) free market is attempting to impose its own legislation on trading with China on third countries. In Mexico, for example, the Chinese automotive industry is rapidly accumulating market share and therefore finds itself in the crosshairs of the US government.

There is no dispute, says Torres: “We are facing an illegal act.”

Two’s Company…

In an opinion piece titled “For China, With Dislike: 544 tariffs,” El Economista’s editorial director Luis Miguel González likened Mexico’s strategic partnership with the US to a marriage, in which “there is no room for a Chinese lover.” He also warned that Mexico’s main trading partner is becoming “increasingly possessive”:

She asks us to prove out love over and over again. She offers us nearshoring as a reward.

The metaphor of marriage and the lover may be crude, but it is true. The same can be said about tests of love. The United States has become very demanding. In December of last year, Treasury Secretary Janet Yellen asked Mexico to create a body to review foreign investments arriving in Mexico. What they are concerned about is a possible under-reporting of China’s investments in our country. In February, White House Trade Representative Katherine Tai raised her voice over the possible introduction of Chinese steel to the United States “disguised” as Mexican steel. Last month, Donald Trump threatened to prevent the entry of Chinese cars if they are produced in Mexico.

Regardless of who occupies the White House next year, Mexico’s commercial ties with China will come under increasing focus — and strain — north of the border. The primary focus of the upcoming review of the Mexico, United States, Canada Agreement (USMCA), will be making the necessary adjustments to position the North American region vis-à-vis China, says Ildefonso Guajardo, a former Economy Minister who headed Mexico’s negotiating team for the USMCA and is currently a coordinator of international issues for presidential candidate Xóchitl Gálvez.

“The real underlying problem for the upcoming review of USMCA in 2026 is neither rules of origin nor transgenics. The problem for 2026 is called China,” Guajardo said this Tuesday, also at an event organized by the Council of the Americas. Guajardo describes China as both a trading partner and a competitor to Mexico. As such, the Mexican government should prioritize its integration with the United States.

But not everyone in Mexico is quite so blasé about the prospect of Mexico’s government throwing all its weight behind the US, to all intents and purposes a declining superpower, in its wider geopolitical struggle with China.

Caught in the Middle

“The old rich guy in town, the US, is having problems with the new rich guy in town, China,” says Enrique Dussel of the Centre for China-Mexico Studies at the National Autonomous University in Mexico. “And Mexico — under previous administrations, and this one — doesn’t have a strategy vis-à-vis this new triangular relationship.”

And that makes no sense given the risk Mexico runs of being caught in the middle of this titanic duel between two superpowers. But according to Mexico’s outgoing President Andres Manuel Lopez Obrador (aka AMLO), Mexico has little choice in the matter:

We cannot shut ourselves off, we cannot break up, we cannot isolate ourselves. It is a fact that we have 3,800 kilometers of border, for reasons of geopolitics (presumably in reference to the US’ invasion, occupation and appropriation of more than half of Mexico’s territory in the mid-19th century). With all due respect, we are not a European country, nor are we Brazil. We have this neighborhood and, furthermore, if we agree on things, as we have done, we can help each other out… Our economic integration is already well advanced.

In fact, in the same speech AMLO actually called for an intensification of North American integration, along the lines of the European Union, while somehow preserving Mexico’s status as a “free, independent, sovereignty” country:

The important thing here is how to strengthen that integration and commitment that is in the interest of both nations, the United States and Mexico, to strengthen North America and subsequently strengthen the entire American continent, just as in the beginning the European Community was created that would go on to become the European Union.

It is baffling to hear a Latin American head of state — especially someone of AMLO’s stature — calling to replicate the success of the European Union. Over the past two years the supranational bloc has not only dynamited Europe’s economic future through its disastrous sanctions against its largest energy provider, Russia, it has been actively complicit in Israel’s genocidal war against Gaza. It also has zero regard for national sovereignty and basic democratic principles, and is doing everything it possibly can to undermine the two.

Ironically, AMLO said the above words in a speech titled “The United States Must Learn to Respect Mexican Sovereignty,” in which he blasted the US State Department for singling out Mexico for “significant human rights issues” in its “2023 Country Reports on Human Rights Practices.” As Mexico’s outgoing president asked, what gives the US government the right to judge other countries on their human rights record, given the hostile way in which it has acted toward so many other nations over the past 200 years:

“How can they talk about human rights if they allocate billions of dollars to war for the death of innocents in all the countries in the world where there is confrontation?… [W]hy don’t they release Assange? Where is the freedom and free manifestation of ideas?

But deep down AMLO appears to believe not only that Joe Biden has a “policy of respect toward Mexico” but that the US can actually be reformed, which brings to mind (or at least my mind) the Scorpion and the Frog fable.

“We have insisted a great deal — and will continue doing so — on wanting to change US foreign policy,” said AMLO. In return, he asks that the US-Mexican bilateral partnership be “based on cooperation, integration and respect for sovereignty.” We need each other, he said, “we complement each other, you just have to learn to respect us.” Will that leave any space for Mexico to continue forging ties with the US’ largest geopolitical rival, China, as well as other strategic partners? AMLO seems to think so; I am not so sure.