The FDI angle

• In 2023, Mexico saw record FDI and imports from China.
• In the same year, it replaced China as the world's biggest exporter to the US.

Why it matters: Growing trade and investment ties with China feeds into the mounting perception that Mexico has become a backdoor for Chinese companies to access the US market. Upcoming US elections and a review of the USMCA may put an end to this state of things.

In March, US presidential candidate Donald Trump spoke of “the monster car manufacturing plants” that China is building in Mexico. Regardless of whether this inflammatory rhetoric is anchored to facts, Mr Trump’s words feed into the growing perception of Mexico as a backdoor to US markets for Chinese goods. 

Indeed, Mexico currently benefits from being a member of the United States–Mexico–Canada Agreement (USMCA), the successor to the North American Free Trade Agreement, having relatively low labour costs and easy geographical access to the US market. In addition, derisking trends, pursued by international corporations wishing to secure their supply chains against geopolitical conflict and move closer to their largest consumer market, have also benefited Mexico. 

In 2023, Mexico swapped places with China as the US’s largest source of imports. According to the US Census Bureau, US imports from Mexico rose 4.6% to $475.6bn in 2023, while US imports from China fell 20.3% to $427.2bn in 2023. 

Much of this drop-off can be put down to a rise in goods manufactured elsewhere by non-Chinese firms and a decline in Chinese direct exports due to trade barriers. However, it coincides with soaring Chinese exports and FDI into Mexico, which gives US policy-makers reasonable doubts that the role of Mexico in the current USMCA set-up is tempering the country’s efforts to restrict the import of Chinese goods and technology. 

Indeed, Chinese FDI in northern Mexico could come under pressure, if not increased scrutiny, because of two events. First is the upcoming US election in November 2024, and second is a planned ‘review’ of the USMCA slated for 2026 — during which the US could use its purchasing power to enforce stricter Mexican oversight and regulation of Chinese FDI. 

Growth, but not scale

“Concerns about a ‘red wave’ quietly infiltrating North American supply chains are mostly overblown,” says Diego Marroquín Bitar, a Mexican trade expert at the Wilson Centre. Mr Bitar notes that it is not the scale of Chinese FDI in Mexico that we should pay attention to, but its growth: “Chinese FDI is low compared to other countries, yet it is growing exponentially.”

According to fDi Intelligence data, there has been a significant, but staggered, rise in Chinese greenfield FDI capital expenditure in Mexico — from a low of $267m in 2018 to a 13-year peak in 2023 at $5.6bn. Noticeably, Chinese capital expenditure on automotive OEM in Mexico peaked at $3.5bn in 2023, fDi Markets figures show. 

Mr Bitar highlights that foreign investment by automotive companies remains much higher in the US than in Mexico, although it is growing faster in the latter. He also points out that Chinese exports to Mexico are also soaring. According to  Trade Data Monitor, exports of Chinese goods to Mexico increased to $81.5bn in 2023, up by 151% from 2016, when Mr Trump first got elected. 

Additionally, growth in Chinese FDI seems to be focused on greenfield projects, rather than brownfield prospects or reinvestment in established concerns. “Last year saw a significant slowdown due to a decline in reinvestments by [Chinese] companies,” says Efrén Flores, a spokesperson for SiiLA, an organisation specialising in advisory services relating to the Mexican real-estate market. “However, new investments from China to Mexico, involving the arrival of new firms, have increased 2.8 times since 2020.”

Mr Flores adds that: “Established Chinese companies in Mexico are adopting a more conservative approach to reinvestment due to factors such as global economic uncertainty, [but] the sharp rise in new investments reflects a strategy of expansion and diversification in the Mexican market.”

Basic manufacturing vs high-tech

Currently, Chinese FDI into Mexico is focused on manufacturing requiring lower levels of technological input. Companies like Man Wah, a furniture operation manufacturing shipping cheap ‘100% Mexican made’ household items from Nuevo León, are prevalent on the northern border. “Currently, Chinese firms operating in Mexico predominantly focus on basic manufacturing sectors,” says Ruben Lostal, Managing Partner, HLM Consulting. “This inclination towards foundational manufacturing activities includes sectors such as automotive parts, electronics assembly and general consumer goods.”

Chinese FDI in Mexico has historically been cautious around capital-intensive investment and projects with a longer-term return on investment. “Multiple failed projects from China, such as the Toluca railway, Bacanora Lithium and Sinopec oil refinery, highlight the fraught relationship between Mexico and China,” says the Wilson Centre’s Mr Bitar. “These cases show how regulatory issues, unfavourable financial terms and geopolitical considerations have often hindered smooth implementation and relations between both countries.”

While Chinese FDI has mostly been concerned with basic manufacturing in rented warehouses just south of the US border, there is increasing interest from capital-intensive and high-tech manufacturers. The Chinese EV manufacturer BYD is now looking at plant locations in Mexico. However, BYD Americas CEO Stella Li has claimed any new operations will be based in central Mexico and directed at a domestic consumer base, not US buyers.   

“Currently, only 3% of the industrial space occupied by Chinese companies in Mexico is dedicated to technology,” like electronics, telecommunications and more advanced products like EVs and microchips, says Mr Flores. “This contrasts with the existing high-tech industry in Mexico, which is primarily dominated by US and German companies. Nonetheless, in the past two years, the industrial occupancy of Chinese tech companies has grown by 39%, indicating a potential shift in the industry landscape.”

Indeed, Mr Flores points to companies like Chinese electronics specialist Hisense who just “announced a $250m investment in 2023 to open their second plant in Monterrey, Nuevo León,” as evidence of this development. 

More on China's FDI and trade:

• Biden's CFIUS order risks spurring anti-China sentiment
• Opinion | Are trade tariffs just a bait to win Chinese FDI?
• Opinion | The Chinese EV tariff domino game
• Chinese exports show no sign of slowing

US Leverage? 

According to the Congressional Research Service: “Under USMCA, most goods that contain materials from non-USMCA countries may only be considered as North American if the materials are sufficiently transformed in the USMCA region.” As such, most Chinese FDI focused on manufacturing or assembly in Mexico will bypass US tariffs if the regional value content of goods “is not less than 60%, or not less than 50% if the ‘net-cost’ method is used”. As long as Chinese FDI in Mexico abides by these rules, the US will have little legal leverage on the current pre-review USMCA. 

However, despite both the current Biden administration and a potential incoming Trump presidency having similar policy orientations on trade with Beijing: Chinese FDI in Mexico might become a political football during the campaign. If tensions ramp up with China, the US could use Mexico’s economic reliance to push through tougher trade regulations.    

“Regardless of the election outcome, Chinese investments in northern Mexico will likely face increased scrutiny and potential additional tariffs on manufacturing,” says Mr Flores. “Additionally, reviewing the USMCA in 2026 could introduce significant changes, including potential modifications to the rules of origin.”  

However, it is also important for any future US administration to be cautious. “It is crucial for the US Congress and the incoming administration to refrain from unilateral actions on China that violate USMCA,” says Mr Bitar. “Such actions would jeopardise the agreement’s review in 2026 and disrupt the positive momentum USMCA has built over the past four years in trade, investment and job creation.”

“If we enter the review with the notion that Mexico has become a leak entry point for tariff-free access into the US market and advanced technology, the USMCA review could go down the wrong path,” Mr Bitar warns. 

Ultimately, Chinese FDI in Mexico is at a tipping point. It could grow exponentially into a large sector of Mexican export capacity or be crushed under renewed scrutiny and a fresh wave of trade regulation. 

Samuel McIlhagga is a freelance journalist based in London.

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This article first appeared in the August/September 2024 print edition of fDi Intelligence.