A recent CSIS podcast with Kenneth Smith Ramos, Chief Trade Negotiator for Mexico from 2017 to 2018 and one of the architects of USMCA, raised issues related to Chinese production in Mexico intended to avoid U.S. tariffs, as well as more general concerns with Chinese investment in Mexico.
The podcast host was Christopher Hernandez-Roy, Deputy Director and Senior Fellow of the CSIS Americas Program. Hernandez-Roy brought up with Smith Ramos whether Mexico "may represent a backdoor" for Chinese goods to enter the U.S. market, asking "how significant is the recent boom in Chinese investment in Mexico?"
Smith Ramos provided a detailed answer to this question. He started by noting that Mexico receives a lot of foreign direct investment in general, "[b]ut increasingly, over the last five years we have seen a growth in Chinese investment." In fact, since 2015, "this has multiplied five times in terms of the investment from China [and Hong Kong] coming into Mexico."
He noted that "traditionally, and even now, compared to what China invests in the rest of the world, they have invested very little in Mexico," as "the official statistics show that last year, we were talking about less than a billion dollars, around $650 million in Mexico." However, he pointed out, these are just the official figures, and "[i]n reality, what we see is ... many Chinese joint ventures, for example, in the automotive sector with MG, the UK company, that is registered in the Mexican investment statistics as a UK investment, when in reality it's Chinese."
He continued, "[w]hat we have seen if you look specifically at the last two to three years, a very strong interest by Chinese companies to enter in the auto parts sector and an interest or stated interest towards the future to enter in OEMs [original equipment manufacturers], basically, in automotive plant manufacturing."
While currently we are "not seeing Chinese OEMs producing vehicles to export in the United States," nevertheless that has become "an issue of political concern in the United States – to what degree Chinese investments in Mexico would be looking to evade specific restrictions that the US has imposed on China."
Smith Ramos then questioned whether adjustments to USMCA's rules of origin would be an appropriate way to address this issue. He noted that, if in 2026, as part of the six year UMSCA review, the U.S. tried "to tinker with the rules of origin in order to discriminate specifically against China," that would be "a dangerous precedent internationally, because we will be changing a paradigm that we've been using for decades, if not for half a century, on how to establish rules of origin in trade agreements, at the WTO and of course in the North American region." And other countries could do the same thing to North American products, he said.
As an alternative, he suggested "stronger trade monitoring systems to know what products are coming in from China, from any other region of the world into Mexico." In addition, reliance on trade remedy measures, stronger IPR enforcement, and tighter labor and human rights enforcement could work. On this last point, he said that "I think some of the measures that the US has imposed against China and other countries in the world where there's violations to human rights, and therefore if that's demonstrated, you can restrict the imports" make sense and "there could be coordination between the three North American countries in that direction."
Hernandez-Roy then asked, "is there a risk to Mexico itself beyond the US concern of too much Chinese investment?"
On this point, Smith Ramos responded, "I wouldn't say that in general you could say that there's a risk of too much Chinese investment." However, he said that "I think Mexico should analyze how to make sure that the imports coming into our country and the investment coming into our country does not represent any potential threat, either to other companies in terms of IPR violations or issues of national security." In this regard, he noted that in the U.S., it "has been discussed in the Congress federally, at the local and state level by governors of the border states, as to how some of the equipment or the technology in the investments that China is making in the northern Mexican border could represent a threat in terms of the surveillance equipment, information technologies that could transfer information back to the Chinese government, etc." He added that "I'm not saying Mexico should necessarily act on that right now," but "I do know that there is not the same degree of urgency in the Mexican government right now with those issues" and "perhaps the Mexican government should take a look at what those concerns are on the part of the U.S. and Canada, what they have done in terms of their legal and regulatory framework to address those issues, and consider whether Mexico should look at that as well."