Mexico, amidst the trade war between the great powers

Mexico, amidst the trade war between the great powers

Esmeralda Vázquez González[1], OBELA[2] 

Mexico is the second-largest economy in Latin America. It has a deep-rooted relationship with the United States through the T-MEC, now affected by the U.S. announcement of unilateral tariffs. It benefits from preferential access to the U.S. market, which has allowed it to export manufactured goods, automobiles, and agricultural products at the cost of importing all the inputs from China to export these products to the North. In the context of the trade war between Washington and the Red Dragon, the tariffs against Mexico prevent Chinese brand products manufactured in the country from entering its market without tariffs. The Aztec country has sought to diversify its relations by exploring trade agreements with other countries and strengthening Asian investment in strategic sectors for domestic purposes. Given the growing importance of the Asian giant in the country, Washington has pressured its southern neighbour to take measures against China, both in terms of tariffs and investment restrictions, considering them a possible risk to U.S. national security. Such policies limit Mexican growth and productive diversification. This article analyses the presence of the Asian giant in trade and investments in the Aztec country and the limits to this relationship due to its alignment with its northern neighbour.

Trade patterns

Mexico's main trade partners in 2024 are the United States, 83% of exports and 40.7% of imports, and China, 1.58% and 20.2%, respectively. Although both trade flows are significant, their patterns are different. On the one hand, oil is at the base of trade with the U.S.  She exports crude oil, accounting for 5.02% of the total sold to the North, and imports refined oil and natural gas, which accounts for 18.7% of its imports. On the other hand, it sells almost nothing to China. Of its export basket, copper represents 22.7% of the total, vital for the electricity industry. On the other hand, diversified purchases range from machinery and office equipment, computers and various inputs, engines and vehicle parts, integrated circuits, and electrical transformers to consumer goods.

The US-China trade war presents Mexico with a unique opportunity to diversify its trade away from the United States. Currently, Mexico's trade with South America is minimal, accounting for less than 4% of its total trade. However, there is potential for this to expand, providing a strategic avenue for Mexico to reduce its dependence on the U.S. market. This diversification could help Mexico navigate the challenges posed by the trade war and strengthen its position in the global market.

China's investments in Mexico

China has demonstrated a strong commitment to infrastructure investment in Mexico, participating in projects as diverse as port modernisation, renewable energies in various regions (such as solar parks in Sonora, Chihuahua and Jalisco, and wind farms in Tamaulipas and Oaxaca) and oil exploration through its collaboration with PEMEX, with the Dos Bocas refinery in Tabasco, the chosen one with a capital injection of 600 million dollars. It also has car factories and sells electric buses. With 120 million inhabitants, the country has a dynamic domestic market and is seen as an interesting partner, not only by China. In addition, it has a highly skilled labour force, natural resources and a favourable geographical position.

The routes that favour maritime connections between the two countries are diverse (Maps 1 and 2). Ningbo, Quindao, Shanghai, Yantian and Shekou ports connect to Manzanillo, Lazaro Cardenas and Ensenada, facilitating trade. Mexico's National Customs Agency (ANAM) reported that operations carried out at the country's maritime customs increased 17.7% at the close of January 2024 compared to the same month in 2023. On the other hand, the Association of Terminals and Operators of Manzanillo (Astom) reported that in the first two months of 2024, there was an increase of more than 1,200% in the arrival of foreign automobiles at the port, reflecting the boom in Chinese, hybrid, electric and conventional vehicles.

In addition, works such as renovating Mexico City's public transportation system, establishing the Dongfeng Camiones plant, and purchasing new units for line 4 of RUTA Puebla have been financed with Asian capital. In addition, line 1 of the CDMX subway received Chinese capital, and CRRC Zhuzhou Locomotive was in charge of the project.

In addition, works such as renovating Mexico City's public transportation system, establishing the Dongfeng Camiones plant, and purchasing new units for line 4 of RUTA Puebla have been financed with Asian capital. In addition, line 1 of the CDMX subway received Chinese capital, and CRRC Zhuzhou Locomotive was in charge of the project.

On the other hand, Yutong (buses) has made inroads for the urban transportation of the CDMX in the Metrobus with a fleet of 60 electric buses and equipping the Passenger Transportation Network. For the renovation of the Trolleybus, the city government purchased 100 units in 2022. The company aims to expand its presence in other major cities such as Monterrey, San Luis Potosí, Guanajuato and Mérida. Most of the mass passenger transportation is operated by the Asian giant, except for the cable bus, operated by Doppelmayr (Austrian) and Grupo Indi (Mexican).

The Mayan train was one of the largest projects of the government of former President Andrés Manuel López Obrador and should boost the development of the southeast of the country. Up to the end of this six-year term, the project had required approximately a US$25 billion investment. President Claudia Sheinbaum 2024 pledged to expand the national railway network to transport goods and people, which opens an opportunity for Asian companies to increase their investments and sell their equipment. The parastatal company China Communications Construction Company, co-invested more than 630 million USD in the construction of the first section (Palenque- Escárcega) in agreement with Consorcio Mota-Engil México, Grupo Cosh, Eyasa and Gavil Ingeniería.

Regarding Nearshoring, China's decision to transfer part of its production to Mexico is a strategic solution to other countries' trade barriers. Concerning the competitive advantages of T-MEC and Mexico's geographical position, it can no longer take advantage of new markets in North America by reducing costs to diversify the risks related to the trade war. President-elect Trump said everything points to the closure of U.S. borders with tariffs and specific bans on products assembled in Mexico from Chinese-owned companies.

Mexico facing the US-China trade war

Washington's concern comes from the fact that China has used Mexico as a re-export platform to avoid trade restrictions imposed by its northern neighbour by establishing production plants in its territory. The situation escalated when Asian interests focused on the electric vehicle industry, where U.S. companies do not compete, except for Tesla.

Although in 2024 only JAC Motors and BAIC have established factories in Mexico, their commercial presence is rising. As can be seen in Graph 2, brands such as MG, Chirey, Omoda and JAC are becoming increasingly important in the Mexican market. The share of Chinese conventional cars went from 0.8% in 2015 to 7.1% in 2023. EV producers such as BYD, MG Motor (parent company SAIC Motor) and Geely have announced their intentions to establish operations in the country (although there is still no data on investment amounts), which will intensify competition with Western brands. One of the main reasons is that cars tend to be cheaper than their competitors. It is due to a well-established supply chain, for example, for producing batteries and electrical components, which ensures economies of scale.

An example of how China vertically integrates its industry and generates economies of scale is Brazil. Rich in natural resources, it buys raw materials from Brazil and invests there to produce electric vehicles for the MERCOSUR market to reach the Pacific coast. Along with national and governmental projects, Asian companies such as BYD and Great Wall have invested in the country. Thus, the Red Dragon is expanding markets to exploit its production capacity fully. Increasing its production volume reduces its manufacturing costs, enabling it to offer lower prices. This approach is the cornerstone of its economic model, centred on massive exports.

BYD and Tesla compete for global leadership in electric vehicles. BYD sold more than 3 million plug-in electrics in 2023 (62% more than in 2022), making it the world's largest manufacturer. Meanwhile, Tesla (a U.S. company) sold just over 1.3 million units in 2023, 40% more than in 2022. BYD leads the way by controlling the entire supply chain, with expansion plans in Latin America. In Brazil alone, it has invested $1.5 billion. Given this, the U.S. has concerns about its market dominance and potential security risks associated with the software, intensifying geopolitical tensions. The Asian presence in countries such as Brazil, Mexico, Chile, and Colombia translates into a growing supply of electric mobility, from urban buses to private vehicles, which are components of the energy transition.

The administration of U.S. President Joe Biden announced in May 2024 an increase in tariffs on Chinese electric cars by 100%, as well as their solar panels, steel and other manufactured products, which Mexico has also taxed (see Table 1). The White House's argument is national security. However, they protect their antiquated combustion auto industry from lagging behind China.

 

Conclusions

Mexico is at a strategic crossroads in the dynamics of the US-China trade war. While the T-MEC has strengthened North American trade relations, Washington's pressures are damaging its ties with China, and the announced tariffs are damaging the spirit of the T-MEC, which is free trade. That concept ended in North American operations. While the Aztec country benefited from its proximity to the United States, its relationship with China, though expanding, was constrained by its northern neighbour's protectionist policies. With tariffs imposed on Mexico's trade, the country must rethink how it can strengthen its relationship with the world's largest and most dynamic market on the other side of the Pacific. The key to Mexico's future lies in balancing these conflicting interests and promoting trade diversification without losing sight of the risks inherent in its preferential relationship with the T-MEC. The door is open for Mexico's reindustrialisation, which is geared towards its vast domestic market and with an eye to the south.