Chinese Companies Are Taking Advantage of United States’ Nearshoring Strategy By Setting up Shop in Mexico

Although China accounts for only a small fraction of Mexico’s total Foreign Direct Investment, it has significantly expanded its portfolio in recent years.

Chinese companies are taking an increasing interest in setting up or expanding their operations in Mexico, as Washington escalates its trade war with Beijing. In 2022, Chinese foreign direct investment (FDI) in Mexico soared by 48% year over year, from $1.7 billion to $2.5 billion [1], according to the Monitor of Chinese Outbound Foreign Direct Investment (OFDI) in Latin America and the Caribbean 2023, published last week by the Center for China-Mexico Studies (Cechimex) at the National Autonomous University of Mexico.

This contrasts with a 6.7% annual drop in Chinese FDI across Latin America as a whole. Although China accounts for only a small fraction of Mexico’s total FDI (roughly 7% in 2022 based on LAC-China Network’s numbers, compared to the US’ 43%), it has significantly expanded its portfolio in recent years and is the fastest growing source of foreign investment in Mexico.

An Interesting But Delicate Position

The report indicates that Mexico has the third largest Chinese FDI footprint in the region, behind China’s fellow BRICS partner Brazil ($5.7 billion) and Argentina ($2.94 billion). This puts Mexico in an interesting — and somewhat delicate — position.

On the one hand, its economy is benefiting handsomely from North America’s nearshoring trend, which is seeing a wave of global companies relocate some or all of their operations from China and other parts of Asia to Mexico in order to serve the US market. Last year, it attracted $35.3 billion in FDI, its highest level since 2015. The sectors attracting most interest among companies relocating to Mexico include automotive assembly plants and suppliers, telecommunications, electronics, pharmacochemical and textile industries.

On the other hand, many of the companies relocating to Mexico are apparently Chinese. Alarmed by the recent shipping chaos caused by the COVID-19 pandemic and growing geopolitical fractures, they are hoping to skirt North American trade restrictions, including USMCA’s rules of origin, by setting up factories in Mexico, as the New York Times reported in February:

[D]ozens of major Chinese companies are aggressively investing in Mexico, taking advantage of an expansive trade deal with North America . Following a path forged by Japanese and South Korean companies, Chinese firms are setting up factories that allow them to label their products “Made in Mexico,” then truck them duty-free to the United States.

The interest of Chinese manufacturers in Mexico is part of a broader trend known as nearshoring or close relocation. International companies are moving production closer to customers to limit their vulnerability to transportation problems and geopolitical tensions.

The participation of Chinese companies in this change shows the deepening assumption that the divide between the United States and China will be a lasting feature of the next phase of globalization. However, it also reveals something fundamental: Beyond the political tensions, the trade forces that bind the United States and China are even more powerful.

The strategy of “nearshoring” in Mexico is nothing new. Countries like Japan and Germany have been manufacturing products like automobiles out of the U.S.’s southern neighbor for decades in order to gain immediate access to the States while benefiting from Mexico’s cheaper production costs. Traditionally, six foreign countries account for the lion’s share of investments in Mexico’s manufacturing industry, says José Ignacio Martínez, the coordinator of the Laboratory for Analysis of Commerce, Economy and Business (Lacen): the US, Spain, Germany, the UK, the Netherlands and China.

Taking Advantage of US-Mexico Tensions

Chinese investments in Mexico are on the rise despite a recent agreement by the governments of the US, Canada and Mexico to set up a committee for the substitution of imports to North America from Asia. At the tenth North American Leaders’ Summit (NALS), held in Mexico City in January, Raquel Buenrostro, called on the region to reduce imports from Asia and bolster the regional supply chain.

Since then Chinese companies have, if anything, intensified their investment push in Mexico…

Read the full article on Naked Capitalism

Leave a Comment

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s