“What the US is really interested in is ‘security shoring,’ not nearshoring,” as it begins to place national security concerns above all other considerations in its relationship with China.
This week, Mexico’s government announced hundreds of “temporary” tariffs on imports from countries with whom it does not have a trade agreement. The tariffs have been imposed on 544 imported products, including footwear, wood, plastic, electrical material, musical instruments, furniture, and steel, and range from 5% to 50% in size. They have one clear target in mind: imports from China, Mexico’s second largest trade partner, though the word “China” is not mentioned once in the decree.
The latest round of tariffs — which took effect on Tuesday — will apply for two years. They come on the heels of a package of tariffs imposed by the Economy Ministry last month on steel nails and steel balls from China. Mexico’s Economy Minister Raquel Buenrostro, speaking at a Council of the Americas event in Mexico City, said the tariffs were necessary to “prevent unfair competition”:
“We have seen a lot of products coming [into the country] … at a very low price and displacing our national producers… The prices for the public don’t go down, but [cheap imports] are displacing textile makers, footwear makers [and other manufacturers].
The move has received plaudits from some Mexican industry bigwigs. The president of the Confederation of Industrial Chambers of the United Mexican States, Alejandro Malagón Barragán, said the move was necessary “to provide fair market conditions to domestic industrial sectors that face situations of vulnerability, especially in the face of the serious non-oil trade deficit with China, which in 2023 reached $104 billion.” The tariffs, he said “are not a protectionist measure, but are necessary to create a level playing field, since they combat unfair practices such as dumping and subsidies that have seriously harmed Mexican companies.”
But while protecting domestic industries may be one of the many reasons behind this fresh raft of tariffs, the main reason is to assuage Washington’s concerns about Chinese companies taking advantage of its nearshoring strategy by setting up shop in Mexico. As the decree itself notes “due to the growing implementation of new trade models at the global level, such as the case of relocation (nearshoring), … it is necessary to implement concrete actions that allow a balanced interaction in the market, to avoid economic distortions that could affect the relocation of productive sectors that are considered strategic for the country.”
Mexico’s imports from China in the first two months of this year alone totaled $19.6 billion, accounting for roughly one-fifth of all of Mexico’s imports, according to El Financiero. That’s up from around 15% in 2015. During the same period, the US’ share of Mexican imports has fallen from 50% to 44%, even as the US and Mexico last year became each other’s largest trade partner, for the first time in 20 years.
China’s share of Mexican imports could reach as high as 29% by 2035, according to some forecasts. The major products imported include telephones, LCD devices, computers, integrated electronic circuits, computer parts, auto parts, TV parts, and printed circuits. Real world data suggest that one possible effect of US tariffs on Chinese goods is that many of the countries that saw faster export growth to the US in strategic sectors also had more intense intra-industry trade with China in those same sectors. In other words, as we’ve seen in Mexico, US dependence on Chinese goods is simply being displaced further down the supply chain.
A High-Risk Strategic Foothold
As I noted in a piece a year ago, the recent surge in trade and investment with China gives Mexico an obvious strategic foothold between the world’s two economic superpowers, but it is not without risk, especially as Washington begins to place national security concerns above all other considerations in its relationship with China:
On the one hand, [Mexico’s] 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.
As I noted in that article, China’s overtures toward Mexico have not gone unnoticed by DC-based lawmakers and lobbyists.
“China increasingly sees opportunity in Mexico, and the investments are increasing,” Eric Farnsworth, vice president of the Council of the Americas, a business lobby group whose members include 200 blue chip companies representing the lion’s share of US private investment in Latin America, told Fox News [2]. “It’s convenient to try to circumvent sanctions … by going to Mexico and then producing in Mexico and then trying to get into the U.S. market.”
China’s ramping up of its commercial and investment activity with Mexico has raised concerns in the Washington beltway that Beijing may be seeking a financial and political upside as tensions between the US and Mexico rise over a whole raft of issues, from energy to GMO foods, to the fentanyl trade (which also involves China) and the Mexican government’s ongoing refusal to endorse sanctions against Russia. According to Farnsworth, the spike in Chinese investment boils down to two main contributing factors: Beijing’s attempts to bypass Washington’s sanctions and deteriorating relations between the U.S. and Mexico.
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Nick Corbishley 