A view of Mexico city's skyline during a sunset as cars are pictured along Reforma Avenue in May, 2023.HENRY ROMERO/Reuters
In the weeks after the election of Donald Trump, Canadian politicians have tried to appease the incoming U.S. president by throwing Mexico under the bus.
Ontario Premier Doug Ford accused Mexico of being a “backdoor” for Chinese goods and called for bilateral trade negotiations that would sideline the continent’s southern partner. Federal Finance Minister Chrystia Freeland said she shared Mr. Trump’s “grave concerns” about Mexico’s relationship with China.
The attempts to cozy up to the U.S. president-elect appear to have accomplished little beyond souring the relationship between Ottawa and Mexico City. Mr. Trump said on Monday he would impose 25-per-cent tariffs on both Canada and Mexico, unless they address border-security issues.
The episode has, nonetheless, drawn attention to the changing geopolitical landscape and highlighted issues that will dominate the economic policy agenda in all three countries in the lead-up to the expected renegotiation of the United States-Mexico-Canada Agreement (USMCA) in 2026.
In Washington, a bipartisan consensus has emerged that China is an existential threat to U.S. economic hegemony. Chinese companies have taken a commanding lead in the production of low-cost, high-quality electric vehicles, posing a grave challenge to incumbent automakers. This prompted the 100-per-cent tariff on Chinese EVs introduced by Washington, and then Ottawa, earlier this year. Mexico City has not followed suit.
Meanwhile, the USMCA, which was designed to boost continental production of auto-parts, has so far done little to wean North American auto supply chains off Chinese inputs.
Against this backdrop, the increased presence of Chinese companies and products in Mexico – with its tariff-free access to the United States – has spooked American policy makers.
Chinese-made cars are capturing a growing share of the Mexican market, and Chinese auto-parts makers are popping up across the country. Several big Chinese car manufacturers – BYD, Chery and SAIC – have announced plans to build full EV factories in Mexico.
“There’s clearly a sense that the United States took its eyes off the ball and over the past 20 years China has made huge inroads in Latin America,” Christopher Hernandez-Roy, deputy director of the Americas Program at the Center for Strategic and International Studies in Washington, said in an interview. “So that’s part of the backdrop when they’re seeing increasing investment in Mexico with the feeling that some of that is being transshipped to take advantage of USMCA.”
Some of the complaints from American and Canadian politicians are hyperbolic and misleading, according to Mexican auto-industry experts. There’s little evidence, for instance, that Chinese-made cars are crossing from Mexico into the United States or Canada. BYD hasn’t broken ground on its planned factory. And the proportion of Chinese-made parts in North American automobiles is falling, not rising.
Still, Chinese companies and brands are building up a noticeable presence in Mexico. That won’t go down well with the incoming U.S. president, who wields tariffs like a cudgel and has threatened a 100-per-cent levy on Mexican vehicles.
“The fact that Donald Trump has been elected again to the U.S. presidency will force Mexico to make up its mind about the type of relationship that it wants to have with China,” Juan Carlos Baker, who was Mexico’s undersecretary of foreign trade during the USMCA negotiations, said in an interview.
“But we need to be given room for that to happen. If Trump wants to hammer China out of Mexico, I just don’t know how that’s going to play out,” he said.
In many ways, Mexico has emerged as the biggest winner from the trade war Mr. Trump started with China during his first term as president from 2017 to early 2021. When the U.S. imposed sweeping tariffs on Chinese goods in 2018, global manufacturers started shifting production out of China and into other low-cost countries.
Mexico and Vietnam have been the main beneficiaries of this “nearshoring” trend and, in 2023, Mexico reclaimed its position as America’s No. 1 source of imports, exceeding China for the first time in two decades.
Most of the new investment in Mexico has come from the United States, Canada, Japan, Germany and Spain. But there has been an uptick in foreign direct investment (FDI) from China, especially in the auto-parts sector, as Chinese companies have set up shop to supply the large American, European and Japanese auto plants operating in Mexico.
Official statistics show annual Chinese FDI in Mexico averaged around US$280-million between 2020 and 2023 – less than 1 per cent of total FDI in that period. However, the actual number is almost certainly higher.
The U.S.-based consultancy Rhodium Group – which tallies deals, even if they’re routed through intermediary countries – found that total Chinese FDI in Mexico is more than six times larger than official figures suggest, with $3.7-billion worth of investment in 2023 alone.
All told, there are now around 70 Chinese auto-parts plants operating in Mexico, out of a total of about 3,000, according to Jorge Carrillo Viveros, emeritus professor at El Colegio de la Frontera Norte. There’s one Chinese car factory – a joint venture between China’s JAC Group and Mexico’s Giant Motors Latinoamérica – which has been operating since 2007.
The big new EV plants promised by BYD and others remain in the planning stage. Even if they do proceed with construction, it seems unlikely that cars rolling off those lines will make it on to American roads, said Mr. Hernandez-Roy of Washington’s Center for Strategic and International Studies. In September, the U.S. government announced it was banning Chinese software and hardware used in EVs.
“While the Chinese companies would love to get into the U.S. market, it’s more likely that, if they do finally establish a presence in Mexico, it will be for the Mexican market, Central America and parts of South America,” Mr. Hernandez-Roy said.
Alongside investment, Mexico has also captured a larger share of trade flows as global commerce has been rewired by American tariffs.
While Chinese exports to the United States have slumped, shipments to Mexico have increased – from an average of around US$75-billion in the five years before the COVID-19 pandemic to US$118-billion in 2022 and US$114-billion in 2023.
This pattern has led some politicians and analysts to accuse Mexico of becoming a trans-shipment point for Chinese goods destined for the U.S. In July, U.S. President Joe Biden put a 25-per-cent tariff on steel coming from Mexico that can’t prove it was melted and poured in North America.
Enrique Dussel Peters, a professor at Universidad Nacional Autónoma de México and co-ordinator of the university’s Center for Chinese-Mexican Studies, said the reality of the trilateral trade relationship between China, Mexico and the U.S. is more complicated than the simple trans-shipment narrative suggests.
Many imports from China are intermediary goods that get turned into final products by U.S and Canadian companies operating factories in Mexico, he said, adding that Chinese parts account for about 21 per cent of the value of Mexican exports, and around 70 per cent of exports from Mexico are done by American companies.
“The problem, if you are going to impose a new tariff on Mexico, is that in reality you are imposing it on U.S. firms established in Mexico, Japanese firms, European firms,” Prof. Dussel Peters said in an interview.
The situation is similarly complex when it comes to Chinese auto shipments to Mexico. Chinese brands are certainly gaining ground in Mexico, supported by an aggressive marketing push from companies like BYD. But around 60 per cent of Chinese-made cars imported into Mexico are produced by General Motors, Ford and other U.S. companies at their factories in China, according to Prof. Dussel Peters.
“Welcome to a much more complicated picture than simply blaming Mexico,” he said.
A central goal of the USMCA, which replaced the North-American free-trade agreement (NAFTA) in 2020, was to reduce the amount of Chinese inputs in North American-made automobiles. The agreement tightened the rules of origin to require 75 per cent of a car must be manufactured in the United States, Mexico or Canada to cross the border tariff-free. That’s up from 62.5 per cent under NAFTA.
This has led to a small decline in the proportion of Chinese auto parts in the supply chain, from around 18 per cent to 16 per cent, said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association of Canada. However, North American automakers are still heavily reliant on many Chinese parts, especially electronics and batteries.
“If you banned [Chinese] products, you couldn’t make a car, never mind an EV,” Mr. Volpe said. “The more sophisticated the car is from an electronic point of view … the less possibility that you can make that car in the next five years, seven years if you restricted the Chinese supply chain.”
Indeed, a number of carmakers have asked that the timeline to transition to the new rules-of-origin be extended, especially for EV parts and batteries, according to a recent report from the Office of the United States Trade Representative.
And there has been a jump in vehicle and auto-part exports to the U.S. from Mexico and Canada, where companies have decided to pay a tariff rather than try to meet the USMCA’s more stringent rules-of-origin. For vehicles, that’s risen from 0.5 per cent of exports in 2019 to 8.2 per cent in 2023. For auto parts, it’s more than doubled from 9.3 per cent to 20.5 per cent.
All this will be top of mind for policy makers in Washington, Ottawa and Mexico City as they work toward the 2026 USMCA renewal, said Mr. Baker, the former Mexican official. But the three partners must work together, instead of trying to shut one another out, he said.
“The fact that we all have attempted different policy vehicles and the fact that China remains our second-largest trading partner, for the three countries of North America, that should tell us that we need to try a different approach,” he said.