China’s Newfound interest for Mexico

Nearshoring has found a silent and surprising admirer. Initially, the process was meant to decouple the US economy from China’s by looking for new and friendlier markets. Mexico naturally emerged as a candidate given its close proximity to the US, low labor costs, and already friendly relations. But now, despite all odds, and the very intention of nearshoring, China has emerged as the newest player on the field. All this through a novel strategy: using Mexico as a middle ground to avoid high tariffs and, potentially, employ free trade agreements to its advantage.

Before delving into this newfound interest—and the many metrics to support it—, it’s worth noting how recent and surprising it is. China isn’t new to Latin America. The country has engaged in an active pursuit of partners in the region over the last decade. In large part, this stems from China’s need to acquire natural resources in order to fuel its rapid growth. Many agreements with countries such as Ecuador and Venezuela have been explicitly tied with natural resources. Ecuador, for instance, vowed to give 80% of its oil to China in exchange for debt financing for infrastructure projects. However, there is also a key geopolitical component in China’s interest towards the region. For years, Latin America had been dominated by US influence, being the top trade partner for many countries in the region. In 2020, the US was even the largest trade partner to all but three Latin American nations—and, in those cases, it was only beaten by Brazil. By 2020, China had taken the lead in six  But China’s economic might managed to shift the course. By 2022, China was already the largest trade partner to six countries, including Brazil—the largest economy in the region—, while signing “Memorandums of Understanding” with an additional 13 countries. The goals, however, were always the same: gaining access to natural resources and countering US influence.

Main Trade Partners to Latin American Countries (2020)

A map showing the largest trade partner of Latin American countries in 2020

(Data from DW)

In this geopolitical puzzle, Mexico has always been of little interest to China. The possibility of accessing Mexican resources was thus blocked for China given the country’s ideological and geographical proximity to the US— countering the US ideologically was not even a possibility. The only major project financed by China in the country—a large shopping center in the state of Quintana Roo—ultimately shut down due to local opposition. As such, instead of importing large amounts of goods from Mexico or financing prominent infrastructure projects as has been the norm with other Latin American nations, China has always favored an exports-intensive strategy without much interaction, as seen by the growing trade deficit between the countries.

Net International Trade with China, according to BCMM

A line chart showing the net trade of goods between Mexico and China over the last 20 years

(Data from Secretaría de Economía)

Perhaps the most important metric of China’s lack of interest in Mexico is the historic absence of Chinese companies in the country. As early as last year, there were just 13 Chinese companies registered in Mexico (a mere 1.4% of the total). To put it in contrast, 43.1% of such companies hail from the US. The same is true for Chinese investment in Mexican companies. ALthough the number is significantly larger—the Mexican government currently registers 1,297 Mexican companies that have received Chinese investment—it still represents just 1.8% of the total. This final point, however, has a crucial flaw. It fails to register any companies after 2021 with Chinese investment, failing to register China’s new found interest for Mexico.

Countries that Most Invest in Mexican Companies

A pie chart showing the countries that most invest in Mexican companies

(Data from Secretaría de Economía)

Furthermore, the above logic neglects once crucial facts. While it is true that China has historically invested in few Mexican companies, the size of it’s investments in them suggests a core truth in its strategic shift towards the country. Starting in 2016, China’s Foreign Direct Investment (FDI) to Mexico has increased disproportionately. Before, in 2013, FDI from China to Mexico was just $31.5bn. Five years later, in 2018, it had grown over seven-fold to over $241 bn. By 2022, Chinese FDI had reached a shocking $587 bn—an 18.63x increase to the original 2013 figure. So, while the number of companies in the country and investments might seem meager, their size and prominence is growing.

Chinese FDI in Mexico (2008-2023)

A line chart showing the annual flow of FDI from China to mexico

(Data from Secretaría de Economía)

The reasoning behind this shift stems directly from US policy. In 2016, the Trump administration began a heated trade dispute with China imposing meaningful tariffs on a large number of Chinese goods. Coincidentally, that is the same year in which Chinese FDI began to grow rapidly in Mexico which, at the time, was in the process of renegotiating its trade agreement with the US and Canada, giving rise to the USMCA. To China, now encountering large blockades by the US government, Mexico soon became an attractive alternative to enter the now barred US market.

China, then, began to see Mexico in a new light. Not as a source of resources or as a pawn in a political fight, but rather as the door to the US. This became even more prevalent after the Biden administration maintained the Trump-era tariffs—a clear signal that, regardless of political shifts in US politics, trade relations would remain tense. Starting in  2020—as Biden became president—and continuing in subsequent years, industrial space occupied by Chinese companies began a steady rise. By the first semester of 2023, it was already over four times its 2019 size and set to grow further.

A bar chart showing the total industrial space occupied by China in Mexico between 2019 and 2023

(Data from SiLLA)

Thus, a puzzling pattern was born. As the US sets its eyes on Mexico as an alternative to China, Chinese companies have done the same. Just last year, Chinese company Lingong Machinery announced a new factory in the state of Nuevo Leon that would total $5bn in investment. The same is true of Chinese solar panel manufacturer Trina SOlar which vowed to invest another billion in the country. Not to mention that three of China’s major car manufacturers—MG, BYD, and Chirey—are actively looking for sites to construct factories in the country.

In fact, those last three companies might hold the key to the true change in China’s approach to Mexico. It’s not just the case that the country serves as an interesting market, but rather, it could be a trampoline to the US and even a means to take advantage of the existing free trade agreement between the two. Take the automotive sector (the one where MG, BYD, and Chirey hope to enter. Just between 2018 and 2022, total Chinese vehicle exports to the country sumped from little below $4 bn to close to $8 bn—a twofold increase. In fact, while most import categories have remained relatively stable in their rankings, Chinese vehicles jumped from being the 16th most important import category in 2018 to the 10th in 2022.

Chinese Vehicle Imports to Mexico (in Billions of USD)

A line graph showing the number of Chinese vehicle imports to Mexico between 2018 and 2022

(Data from Secretaría de Economía)

Chinese imports, of course, are not subject to the benefits from the existing trade deals between Mexico and the US. In the near future, however, Chinese companies could take advantage of such treaties by building factories in the country. Such drastic increases in strategic sectors—as those in the automotive industry—must then be interpreted as a first step towards the Mexican market. By importing large amounts of vehicles and sending country representatives to Mexico, Chinese companies gained a foot in the country and an opportunity to scope out territory for potential factories in years to come. 

All this, in a way, is merely the start. It’s still unclear how much China will invest in Mexico, but the fact such investments exist is already a key signal of changing trends. For most of recent history, China has been unable to fit Mexico into broader strategies of resource gathering and geopolitical gameplay across Latam. Now, it has found a new approach to the country seeking to regain at least a fraction of its lost US market. Thus, unexpectedly, China and Mexico have begun a strange relationship powered by economic factors. Seeking to eventually enter the US market, Chinese companies start investing in Mexico hoping to place a “Made in Mexico” label on Chinese goods. At the same time, Mexico has opened its doors to international investments hoping to take advantage of the broad “nearshoring” trend. Both are taking advantage of economic forces in full swing.

 China has set its eyes on Mexico, the question that remains is how big of an investment will follow soon after.