Nearshoring in Mexico: China’s Unforeseen Influence

By Senior Mexico Analyst Fernando Varela

At first glance, US-based companies deciding to “nearshore” their industrial operations in Mexico seems like a win-win opportunity to boost both countries’ economies and jobs.

However, the arrangement is not as rosy as it may appear. The US-Mexico nearshoring trend has been a complex affair since 2016, when then-US presidential candidate Donald Trump called the existing North American Free Trade Agreement (NAFTA) “the worst trade deal” ever signed. 

Trump proposed a new deal that sought to reduce the US trade deficit with Mexico and Canada and avoided using the depreciation of the Mexican peso as a trade policy measure. The three countries agreed to replace NAFTA with the US-Mexico-Canada Agreement (USMCA), which Congress approved in 2020.

However, one of the biggest concerns about trade between the US and Mexico involves a country that is not privy to that agreement — China. Facing US tariffs, Chinese companies have been making large-scale industrial investments in Mexico.

“The current trend of relocating factories and production facilities to North America is driven by a convergence of factors,” a March 2024 report from Rice University’s Baker Institute for Public Policy states. “The US-China trade war is key among them, with the US imposing penalty tariffs of around 25% on many goods directly imported from China.”

Component Concerns

Chinese companies have significantly boosted their industrial operations in Mexico in recent years. 

China has been Mexico's second-largest commercial partner after the US since 2003, an opinion article in Expansión pointed out in February. The article adds that more than 91% of the imports from China are intermediate goods — the components, supplies, and raw materials used to manufacture final consumer products.

However, Mexico’s growing trade deficit with China concerned former president Andrés Manuel López Obrador by the end of his term. Finance Minister Rogelio Ramírez de la O, who kept his position under President Claudia Sheinbaum, announced that Mexico would review its trade relationship with the Asian country because it is heavily dependent on commodities. Furthermore, Expansión reported that Mexico implemented “a series of actions” aimed at controlling Chinese trade amid US pressure.

President Sheinbaum’s administration has already said it wants to reduce Chinese imports. A week after Sheinbaum took office, an exclusive Wall Street Journal interview with Mexico’s Deputy Trade Minister Luis Rosendo Gutiérrez revealed that the incoming administration has had “informal” talks with international companies about identifying Chinese-manufactured components and parts that Mexican companies could produce. This appears to be a new initiative, as former president Andres Manuel López Obrador was not known to consult directly with international companies. 

A Range of Industries 

Chinese companies are embedding themselves in Mexico’s economy not only through manufacturing the materials and components that end up in final products, but by operating industrial factories on the ground. A June 2023 Forbes México article said that more than 100 Chinese companies had leased 5 million square meters of industrial space across Mexico, with major players including the Hengli Group, Lizhong, Alibaba, and State Power Investment Corp.

Under the USMCA, a manufactured product must have a required percentage of components made in North America to qualify for free-trade tariff exemptions. This percentage is at least 75% for cars and light trucks. Separately, US President Joe Biden’s administration increased tariffs on Chinese electric vehicles (EVs) and other goods in May 2024.

“Washington is concerned that the Chinese firms aim to circumvent high US protectionist barriers against low-cost Chinese EVs by assembling and exporting them from Mexico, taking advantage of its duty-free access under the USMCA,” the Boston Consulting Group wrote in a September 2024 article. “Both Democrats and Republicans have indicated they intend to keep that from happening.”

Steel and aluminum also pose concerns. In July 2024, the US started levying a 25% tariff on steel imports from Mexico if the material was originally smelt or cast outside of the three countries belonging to the USMCA, and a 10% tariff on imported aluminum from Mexico if the material was produced in China or a few other countries. The Mexican government agreed to require private industries importing steel and aluminum to provide precise information about where the products originated.

An April 2024 BBC article highlighted how Chinese company Man Wah was manufacturing home furniture in Mexico and selling it to US retail chains such as Costco and Walmart. 

“Man Wah is one of scores of Chinese companies to relocate to industrial parks in northern Mexico in recent years to bring production closer to the US market,” the BBC article stated. “As well as saving on shipping, their final product is considered completely Mexican — meaning Chinese firms can avoid the US tariffs and sanctions imposed on Chinese goods amid the continuing trade war between the two countries.”

The US-Mexico Relationship 

As controversial as Chinese capital investment might be for US-Mexico commercial relations, Chinese investments have significantly boosted the Mexican economy. Citing figures from the Academic Network of Latin America and the Caribbean on China (RED ALC-China), academic researcher Enrique Dussel Peters said Chinese investments “have become an indispensable factor in supplying the national market and exports from Mexico,” and that replacing Chinese suppliers in the short- or medium-term seems impossible. 

However, recent comments from Sheinbaum’s cabinet members challenge that premise. This week, Mexico’s Economy Secretary Marcelo Ebrard suggested that the country would side with the US in its trade conflict with China, the Associated Press reported. 

Meanwhile, governors in several Mexican states bordering the US have eagerly promoted Chinese companies’ relocation plans. Nuevo León Governor Samuel García (who plans to run for president in 2030) highlighted Boda International Holding Group’s USD850 million investment to build “smart” homes in the state. Governors from Baja California, Sonora, and Chihuahua have made similar announcements. 

Regardless of whether Kamala Harris or Donald Trump wins the presidency, the US is expected to continue pressuring Mexico to limit the role Chinese companies play in manufacturing exports there. In March, presidential candidate Trump pledged to apply heavy import tariffs to the vehicles Chinese companies manufacture in Mexico. The New York Times pointed out that the Biden administration kept the tariffs Trump imposed on Chinese imports during his presidency, and recently raised them on several types of goods. A USMCA revision is scheduled for 2026. 

Nonetheless, Chinese companies’ participation in the US-Mexico nearshoring scheme is already deeply ingrained. Breaking away from this status quo may prove challenging.

---

Whether it’s Mexico or elsewhere in Latin America, Southern Pulse has the experience, network, and relationships to simplify this challenging region with honest, direct answers to your most complicated questions.

Want to learn more? Let’s chat.

CC BY-ND