Mexico, U.S. and China offer an evolving ‘triangular’ trade relationship

Q. How has China’s involvement in Latin America, and especially Mexico, evolved since China joined the World Trade Organization (WTO) in 2001?

I always say jokingly let's imagine a video, A Day Without China in Mexico. We would walk barefoot without underwear. We wouldn't be able to have this conversation because most of the antennas in Mexico are from Huawei [Chinese telecommunications firm].

Chinese firms are renovating the metro, the [Mexico City] subway. Ports and airports are being built by China. The presence of China in Mexico and in Latin America has increased dramatically.

We highlight a group of concepts that are important. For example, the concept of new triangular relationships. This is fundamental today from a Mexican perspective. We must deal with the United States, which is the point of reference for Mexico. There is no question. But the presence of China is also relevant.

So, we must build the strategy vis-à-vis both the United States and China; a discussion of the United States or China is not realistic for Mexico in 2025.

Q. How has the way we think about China in economic terms evolved over time, say compared with when China joined the WTO?

China is a completely different country. Mexico has also changed. At the end of the 1990s and early 2000s, there was still a discussion of the competition between China and Mexico. This is to say, China is now in another league. China today is in the league with the United States. Mexico and other countries in the region of Latin America are far behind from China.

Today, China is developing the technology and designing the equipment to produce goods, such as garments. China today is investing worldwide.  

Q. How has China's Belt and Road Initiative to fund growth and trade-related infrastructure and other initiatives abroad made a significant difference in Latin America?

It's a process of globalization with Chinese characteristics. Now, very specifically and concretely, cooperation in terms of infrastructure, etc., has dramatically increased China’s presence in Mexico and Latin America.

We [Mexico] are not a member of the [Beijing-based] Asian Investment in Infrastructure Bank. Still, China cooperates fully with Mexico in terms of investment, trade and infrastructure, but also with cultural and academic exchanges.

Q. After the U.S. increased tariffs on China in 2018, we know U.S. imports from China declined, while Mexico’s imports from China rose. Many people are talking about producers exiting China and taking production elsewhere, including Mexico. Do you see this happening, and if so, is this benefiting Mexico?

Mexico is becoming the back door of China. You have this confrontation between the U.S. and China with tariffs, etc., and Mexico has a big sign saying, “Welcome China.” I would highlight the concept of new triangular relationships emerging.

The increasing presence of China in Mexico and in Latin America has been going on for 20 years, not for six months.

We [at the Center for Chinese–Mexican Studies] recently calculated, based on input/output tables, that 7.5 percent of Mexico's exports to the United States in 2020 were Chinese value added. People in Washington would say , “I told you so.”

Who is in Mexico importing from China? Seventy percent of Mexican imports are being pursued by foreign firms, mainly by U.S. firms. You have General Motors, Ford, Volkswagen and Hyundai and many others that are established in Mexico. They import from Brazil, China, the United States and many countries and export to the United States.

Welcome to a new triangular relationship that has been evolving in the 21st century. Welcome to a pretty complex relationship that has not been sufficiently understood in Washington, I unfortunately believe.

This is what has been evolving since NAFTA [the North American Free Trade Agreement of 1994] and particularly since China became a member of the World Trade Organization— the massive, export orientation of China, and China becoming the No. 1 exporter in the world.

Q. Even though the pace of China's foreign direct investment in Mexico has increased in recent years, it only represents about 0.8 percent of the total. However, we constantly hear among our contacts that Chinese investment may be underestimated. How big is China's investment in Mexico?

We have a monitor of China's investment in Latin America that we publish every year. Official Mexican sources highlight that through 2023, the accumulated investment was $2.5 billion, according to the Secretaría de Economia [Secretary of the Economy]. According to our statistics, with different methodology, Chinese investment accumulated through 2023 was $22.5 billion. This is over 800 percent more.

What is the difference if a Chinese firm wants to invest in Mexico from Shenzhen, but for whatever reason—for tax reasons or for whatever—they will go twice around the world first. The funds end up in San Diego in the United States and, from San Diego, the firm invests in Querétaro, Mexico

In this example, the transaction is registered as an American investment in the official statistics. [But] I know this call center is from a Chinese firm. It's a Chinese transaction.

So, according to our statistics, China is already the sixth-most-important foreign investor [in Mexico]. According to official statistics, it is the 18th. Statistics and methodologies matter, and [Chinese] investment is growing very quickly.  

Q. Where is the Chinese investment going? Is it going into manufacturing, or is it also going into infrastructure projects, to government-related areas?

Strictly speaking, Chinese investment in Mexico is different than in Chile, Argentina, Peru and other countries in South America; 70 percent of Chinese investments in Mexico go to manufacturing and very strongly to auto parts and automobiles.

For more than 10 years, China has been investing in Mexico, mainly in manufacturing for both the domestic market and for export orientation to the United States. We have visited dozens of Chinese firms in several states in Mexico in which you have a car that says, “Hecho en Mexico,” made in Mexico, but where the windshields, harnesses and tires are either imported or produced by Chinese firms in Mexico. Again, the OEMs [original equipment manufacturers] are mainly American firms.

Q. Given China's growing role in the region, how has its current economic slowdown affected Latin America and Mexico?

What we have learned in Latin America and in Mexico is, of course, that not everything grows exponentially. Neither China's GDP [gross domestic product] nor Chinese investments. At the beginning of the 2000s, there were very high expectations regarding trade with China and investments from China, namely that they were going to grow by 20, 30 percent annually.

And you know what? In some years, investments and trade with China have fallen. It is important to understand that China is a country like any other—not everything will grow forever. Still, the slowdown of China's economy has affected Mexico less than other Latin American countries because Mexico is not a supplier of raw materials.

In countries such as Argentina, Brazil and Peru, trade is directly related to iron, soybeans, fishmeal, oil. And these suppliers of course, have had more problems regarding the ups and downs of China's economy. Mexico, from that perspective, has had a more stable relationship. By the way, Chinese imports in Mexico have been growing without exception in the past 25 years. In 2024, for the first time, Chinese imports accounted for more than 20 percent of Mexico's total imports.

Q. The new U.S. administration has spoken in adversarial terms about both China and Mexico. How do you see this affecting the U.S.–Mexico trade relationship?

It is surprising from a Mexican perspective that the new president picked Canada, Mexico and China, the three most important trading partners of the United States, for higher tariffs, not recognizing the enormous efforts by American, Canadian and Mexican firms to integrate as they have been doing for 20-plus years now.

In the short term, higher tariffs will affect American firms established in Mexico. They are the motor of Mexico's trade growth with the United States.

There are no Chinese firms established in Mexico that export to the United States. They know this is politically not viable.

Look, what is happening these days is an enormous degree of uncertainty for everybody, not only for Chinese investors or for Chinese importers in Mexico, but for all exporting firms, from those of different nationalities. Though that includes mainly American firms, it also involves European, Japanese and Korean firms that are established in Mexico in order to export to the United States. Nobody knows what is going to happen.

In 2023, Mexico paid a tariff of 0.26 percent for its exports to the United States. If you are going to increase the tariff from 0.26 percent to 15 percent, this matters. And in auto parts, automobiles and many others, the tariff has been 0 percent.

Paying an extra 15 percent is serious business. If you are going to do this [obtain tariffs] from Canada, from Mexico and an additional percentage just from China, this will seriously disrupt your business—the business you have been doing the last 20 or 30 years.

It is generating massive uncertainty. You will not invest until you know what will happen. You will not increase your production if you don't know if you are going to be paying [tariffs of] 5 percent, 15 percent, 25 percent. It's a huge uncertainty and completely counterproductive for U.S. firms.

Q. What is the alternative for North American manufacturing?

The concept of new triangular relationships is not an abstract academic result. It is more a result of current reality—for example, global value chains between China, the United States and Mexico.

An alternative to that? We could start discussing—as the Mexican government is doing, for example—import substitution from China. But this will not happen in a weekend. Firms established in Mexico have been importing from China for the past 20 years, and China's imports have been increasing throughout the 20 years. So, if you want suddenly to substitute for Chinese imports, for example tires, what do you do?

Who produces tires? The Vatican does not do it. Switzerland does not do it. Do we want to have it in the United States? You know what? Most communities don't like these kinds of factories. This [import substitution] will take time and will be expensive.

It is important that policymakers in the U.S. and Mexico and Canada also start discussing realistic scenarios and not ideologically appealing debates that do not make any sense. Many people in Washington think that in a weekend, you can set up a factory. This is not realistic.

This is an edited and abridged version of a conversation available on the Southwest Economy Podcast.