Today's Deep Dive is 1,840 words and a 12-minute read.
Prior to the US presidential election, Mexico had already emerged as a key site for the evolving trade battle between the US and China. Regarded during President Biden's term as a backdoor for restricted Chinese imports, and by incoming President Trump as a potential bad actor in international trade on its own merits, Mexico holds an increasingly unique, and central, position in global trade. Attitudes and policies in Washington, Beijing and Mexico City are changing, with negative sentiment towards Chinese exports to Mexico rising in the US as Mexico experiences a long-desired manufacturing boom.
Chinese Trade War and Mexico's Manufacturing Boom
In the last several years, Mexico emerged as a trade and manufacturing rival for China as Western countries sought to near-shore manufacturing in a bid to secure supply chains amid rising geopolitical tensions with Beijing. Mexico is viewed as an attractive investment target due to its multitude of free trade agreements (including the landmark US-Mexico-Canada Agreement (USMCA)) and proximity to American markets. This year, Mexico surpassed China as the US' second-largest trading partner (after its other neighbor, Canada), and the US accounted for 40% of all FDI in Mexico (the largest single source). At the same time, US imports from China fell for the first time in 2023. Myriad US companies – largely in the automotive, tech, and manufacturing industries – have announced expansions or new sites in Mexico, signaling rising US reliance on imports from its southern neighbor.
Complicating this strengthened trade relationship is the fact that a significant amount of the growth in manufacturing in Mexico has come as a result of Chinese investment – a deliberate attempt by Chinese companies to restructure their supply chains due to increasingly restrictive defensive trade measures implemented by the US. Although these measures began with President Trump in 2016, President Biden largely aligned with Trump's more hawkish views on China, and the trade relationship has grown increasingly tense in recent years: Biden built on Trump's tariffs by quadrupling them on Chinese-made electric vehicles, tripling them on steel and aluminum, doubling the duty on semiconductors, imposing export controls restricting Beijing's ability to obtain advanced technology from the US, and banning US investment in sensitive technologies. There is a strong bipartisan consensus that unrestricted trade with China risks both American economic stability (there are concerns over competition, especially in the EV sector, and of dumping and government subsidies) and national security (especially in the areas of sensitive technology and the semiconductor supply chain).
Many Chinese companies have responded by turning to Mexico as a back door to access the large US market without facing onerous tariffs. Chinese companies are increasingly establishing manufacturing facilities in Mexico, importing raw materials or industrial components from China for further processing in these factories, and then exporting to the US a product that can now be legally labeled "Made in Mexico." As long as these products abide by the USMCA requirement that goods must be "sufficiently transformed in the USMCA region" to count as North American, the US has little leverage to push back on their importation. The average American tariff on imports from Mexico in 2021 was 0.2%, vastly lower than on those from China, benefitting from the low trade barriers and incentives agreed to in the USMCA. Key sectors of concern include automobiles and various mechanical and electric components. Electric vehicles, which are eligible for hefty tax incentives under the Inflation Reduction Act as a bid to boost domestic EV production in addition to slashing emissions, are a significant area of concern for US policymakers seeking to ensure that Chinese companies do not benefit from incentives designed to benefit American manufacturing and consumers.
China's use of Mexico to benefit from US near-shoring is visible in trade data: Moody's Analytics shows that the share of foreign added value incorporated into Mexican exports by China rose from less than 5% in 2000 to almost 40% in 2020, by far the largest single contributor. In the last few years, China dramatically ramped up its exports to Mexico: data from freight analytics company Xeneta shows China-to-Mexico container trade up by 26% between January to July 2024, after growing by 33% in 2023. By some estimates, Chinese FDI in Mexico has increased from $500 million in 2000 to $3.5 billion in 2023, which is relatively low compared to China's FDI in other countries, but rising significantly every year (two investment announcements in October 2024 alone amount to $6 billion). While some of these imports are simply entering the Mexican market, a surge in cross-border exports from Mexico to the US in certain industries demonstrate is also evident. The import surge tracks with a rise in trucking from Mexico to the US; data from Motive, which tracks trucking stops at North American distribution facilities for five top retailers, showed in September a record level of truck border crossings and ground import volumes. American and Mexican logistics firms are scrambling to establish physical hubs in Mexico's north, especially in the northern state of Nuevo León – Laredo, Texas, across the border, has become the largest gateway for cross-border freight shipping between Mexico and the US. It is worth noting that Mexico is only one of Chinese companies' outbound investment destinations. China's outbound investments have quickly expanded to many countries such as Vietnam, Malaysia, Indonesia, Thailand and Serbia since the U.S.-China trade war during Trump's first presidency, as an attempt to diversify Chinese companies' supply chains for the international market. China's recent customs statistics also suggest China's exports to its largest trade partner, the ASEAN countries, have increased 12.5% for the first ten months in 2024 compared with the same period in 2023. As such, the effects of restricting the U.S. imports from Mexico alone for the concerns about China are likely to be limited.
In past years, Mexico has wavered on the role it wants to play in the global struggle for trade dominance: on the one hand, it has benefitted significantly from becoming a way station for Chinese raw materials, and balancing its trade position between the US and China has been worth the effort for several years. On the other, the looming east-west divide in global politics and economics could also push Mexico to side more decisively with the US on Chinese trade. In many instances, Mexico has complied with rising American efforts to crack down on China using Mexico as a back door to sell goods of all types: in August, Biden ended a USMCA exception exempting Mexico and Canada from duties on steel and Mexican products poured outside of North America, and in April, Mexico raised tariffs on Chinese steel on its own. Both President Obrador and new President Sheinbaum have repeatedly emphasized that Mexico does not intend to be a "springboard" for China to enter the US. However, Mexico has also courted China: early this year, it briefly suspended and then quickly resumed talks with Chinese carmakers on the construction of factories in Mexico, and in October was publicly mulling tax credits to attract foreign firms to invest and manufacture domestically, Chinese firms explicitly excluded.
A more decisive alignment with the US appeared more likely in the last several months of President Biden's tenure: in early October, Mexico's Economy Secretary announced that Mexico "now [had] a plan for a route to follow" on trade: "mobilize all legitimate interests in favor of North America." Citing plans to not only pursue more near-shoring (always popular) but also to increase Mexican domestic content in manufacturing and reduce reliance on Chinese imports, the announcement came across as an implicit alignment with the American perspective on Chinese exports. With recent political developments, however, it is unlikely that this plan will be fully fleshed out, let alone executed.
Changing Rhetoric from Washington and Mexico City
Political headwinds increased for Mexico City as President Trump's reelection campaign gained steam, with Mexico becoming a central target in the global trade war. Where the Biden White House saw Mexico as a potential ally to be courted in the global effort to reduce Chinese trade dominance, the incoming Trump administration sees the Sheinbaum government as complicit in China's growing trade dominance – ultimately another potential rival to contend with in global trade. In conjunction with domestic political concerns about immigration over the Mexican border, the loss of US manufacturing jobs, and the fentanyl trade, the US-Mexico trade relationship is likely to become much rockier in the next four years.
President Trump has threatened to impose 25% tariffs on Mexico on the first day of his presidency if the country does not stop the flow of migrants and drugs to the US. Trump has also called for an additional 10% tariff on goods from China, and 100% tariffs on BRICS countries, including China, if the countries continue to discuss the de-dollarization of trade, which analysts worry may play into harsher tariffs on Mexican imports due to high Chinese content (although the legality of applying tariffs to a USMCA country is not clear-cut). Mexico has in turn threatened retaliatory tariffs. Trump and Sheinbaum held a call last week after which both leaders released optimistic statements (Sheinbaum said, "there will be no trade war"), but it was not clear whether a new consensus had been found or whether both sides were simply reiterating their positions.
Beyond President Trump's day-one trade restrictions, analysts are nervously awaiting the planned 2026 renegotiation of the USMCA – at which the US will likely push hard for stricter regulations surrounding Chinese investment in Mexico. The US will likely seek stricter Mexican scrutiny of Chinese FDI, especially in competitive or sensitive sectors – the US and Mexico signed a memorandum in late 2023 agreeing that the US would assist Mexico in establishing a CFIUS-like screening program to reduce national security risks, and the US will likely push for China to be considered more significant in consideration of investment risk. The US could also call for separate trade measures to restrict the entrance of Chinese goods, components and raw materials into the USMCA bloc as a whole, a measure that would likely face significant pushback from Mexico City. Washington may also seek to make it easier to impose trade restrictions against Canada and Mexico for actions deemed dangerous to American national security, which both Canada and Mexico would likely strongly oppose.
Despite worries of a trade war, US-Mexico trade has not flagged yet, likely hopeful for a deal early in Trump's presidency. Mexican President Sheinbaum has projected confidence that she can strike a deal with Trump, although analysts worry that a personality clash – Trump was relatively close to her predecessor AMLO, and Sheinbaum has already appeared less willing to back down – could make close cooperation difficult. Even in the absence of concrete trade barriers, negative sentiment in the US and regulatory uncertainty could dampen private sector enthusiasm for Mexican imports. A trade war could have wide-ranging impacts for Mexico, the US, and private industry, dampening Mexico's manufacturing boom, driving US consumer prices higher, and damaging the US-Mexico bilateral relationship – an important trade partnership and, until recently, potential partner in countering global Chinese economic influence.
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