In 2023, Mexico became the United States’ top trading partner, surpassing China. Just as the Mexican and American economies integrate, though, so have the Mexican and Chinese economies, with China now the former’s fastest-growing foreign investor.
This has worried Washington, including members of the House Select Committee on the Chinese Communist Party, who see in Beijing’s investments an attempt to take advantage of a permissive North American trade deal.
Put simply, while some view Mexico-U.S. integration as reflecting a success in decoupling from China, others believe that the Asian giant is trying to better its relationship with the U.S.’ neighbor in order to dodge sanctions and tariffs.
There are good reasons to believe this. After all, following the COVID-19 pandemic and President Donald Trump’s trade war with China, Chinese foreign direct investment in Mexico grew by three times between 2019 and 2021. In Nuevo León, the Mexican state with the highest total gross production, Chinese corporations were responsible for 30 percent of foreign investment in 2021.
Whatever Americans may think about the investments, Mexicans had more than enough reasons to celebrate: billions of dollars poured in from Beijing, thousands of jobs were created, and their country’s geopolitical relevance increased. From the government palace in Monterrey, the governor of Nuevo León, Samuel García, cheered: “Nuevo León is having a geopolitical planetary alignment. We’re receiving lots of Asians who want to come to the U.S. market.”
With these developments, it made sense for Mexico to further enhance its trade relationship with China, becoming a middle man of sorts between the world’s two largest economies. As U.S. imports from China fell by 25 percent during the first six months of 2023, Beijing decided to fixate on Mexico.
But just as investments boomed, Mexico decided to temporarily increase tariffs of between 5 and 25 percent on a total of 392 products for countries with which it does not have a free trade agreement, including China. The tariffs, which were put in place on August 16, impact around 90 percent of Chinese exports to Mexico, and will remain in effect until July 2025.
The reaction from Beijing was understandably negative. Following the announcement of the tariffs, He Yadong, spokesman for China’s Ministry of Commerce, expressed hopes that Mexico would “stick to the free-trade principle and remain cautious in implementing such measures. The higher tariffs of Mexico will affect investors’ confidence.”
At first glance, the move is puzzling. Why would Mexico restrict trade with its fastest growing investor? There is no obvious single answer, but upon further examination, there are various factors that may explain the country’s decision.
Option 1: Mounting U.S. Pressure: With growing U.S. dissatisfaction with China’s economic influence in Mexico, the North American country may just be attempting to satisfy some U.S. wishes and to preserve a functional relationship with both great powers. Mexico continues to be highly dependent on external trade, and cutting its trade with China significantly may not be a sustainable option.
But in order to maintain its close relationship with the U.S., still the country’s closest security partner, currency lender, and largest foreign direct investor, Mexico may have had to reluctantly make this move as a show of good faith. The two countries have been negotiating over their trade and security partnership, with prominent bilateral visits in recent weeks and tensions over migration, democratic stability, and gang violence mounting. The move may have been a precondition of U.S. negotiators as part of these efforts.
U.S. officials are clearly worried about the growing Chinese influence in their backyard, and now see their southern neighbor embarking on the same path. Raising tariffs may have been the best “bad option” for Mexican negotiators to remain in good standing with the U.S. while maintaining favorable diplomatic ties with China. Most Latin American countries are stuck between a rock and a hard place in their relations with China and the U.S., having to balance the two great powers’ geopolitical concerns with their own national economic interests. Mexico now also has to face that difficult reality.
Option 2: Increase State Revenues: Ahead of an election year, Mexico is currently facing a high deficit, now projected at 4.9 percent of its GDP, in part to pay for ambitious new social programs and territorial development projects. The tariffs will help generate new revenues for the state, and reduce the country’s trade deficit with China.
The main exports sent from Mexico to China, namely steel, aluminum, auto parts, and chemicals, now incur new tariffs. Given that Mexico exported $1.9 billion worth of goods to China in October alone, these tariffs could help generate billions in additional revenue for the Mexican state in a difficult economic and financial situation.
Beyond diplomatic statements expressing frustration, neither Chinese businesses nor the Chinese government have shown any signs of slowing or stopping investment and trade with Mexico. The cost of leaving is probably much higher than those imposed by the new tariffs, thus not generating a sufficient incentive for Chinese companies to pack up shop. Regardless, China was most likely warned before the tariffs were put in place, allowing it to make the adjustments necessary to reduce any losses. As a result, these tariffs will allow Mexico to generate additional revenues with little blowback, calming its northern neighbor in the process.
Option 3: Nudging China Toward a Free Trade Agreement: As mentioned, the only countries targeted by the new tariffs are those with which Mexico does not have a free trade agreement (FTA). The move is meant as a nudge, telling its trading partners, including China, that if they negotiate an FTA, the tariffs will be lifted.
On November 16, Mexican President Andrés Manuel López Obrador and his Chinese counterpart Xi Jinping met on the sidelines of the APEC Summit in San Francisco, promising more trade and cooperation. China has key trade and investment projects lined up in Mexico, including new Chinese company factories in the North, an investment corridor in the South, and energy developments.
An FTA could help facilitate these developments and put Mexico (and China) in a more favorable negotiating position. With the U.S. and other key Western economic partners nearshoring, Mexico might be looking to expand its trade with China without surrendering its bargaining power too swiftly. For instance, it may be trying to expand its exports to China and redress its lopsided trade deficit with China; the country currently imports about nine times as much as sends to China.
An FTA could alter the balance, and China now has the next move.
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