"'Keep a low profile. In recent weeks, officials at the Chinese Embassy in Mexico have repeatedly repeated such advice to Chinese-owned factories in Mexico. ”
According to Hong Kong's "South China Morning Post" reported on April 6, as the U.S. election is approaching, from the self-proclaimed "staunch believer in tariffs" Republican Trump, to the "electric car dream" of Democrat Biden, protectionist rhetoric is popular in Washington, and Chinese car companies that "go overseas" to Mexico are avoiding becoming the "first bird" to be targeted.
However, the report said that this has not hindered the enthusiasm of Chinese companies to invest in Mexico, and Mexico is also looking forward to the "settlement" of global electric vehicle manufacturing leaders like BYD, which can give the country's manufacturing industry a share of the global supply chain remodeling. In this regard, some voices are concerned that the United States still has a large geopolitical influence on Mexico, warning that the United States may use the provisions of the "United States-Mexico-Canada Agreement" (USMCA) to "harass" Chinese companies, but some experts believe that the Mexican government will not agree to discriminate against foreign companies.
BYD D1 electric car operated by Vemo taxis in Mexico City, Mexico, November 20, 2023 Photo credit: Visual China
China's "Monster Car Factory" Enters Mexico?
Indeed, even without a reminder from embassy officials, warnings from Mexico's northern neighbor "more clearly than ever" will not make Chinese companies forget to be vigilant. The latest verbal threat comes from former US President and Republican presidential candidate Donald Trump, who claimed at a rally in mid-March that the Chinese were building "big monster car factories" in Mexico and that if he returned to the White House, he would impose 100 percent tariffs on Chinese cars produced in Mexico.
The South China Morning Post pointed out that so far, Trump's plans for the so-called "big monster car factory" have not yet been implemented. Electric vehicle giant BYD has been evaluating the feasibility of building a factory in Mexico, but is expected to focus on the local market rather than export to the United States, according to Mexican officials familiar with the plan. At the end of February this year, Li Ke, president of BYD's North American branch, said that the location of the Mexican factory would be determined by the end of the year.
On the other hand, in Monterrey, the capital of Nuevo León in northeastern Mexico and an industrial city just over 200 kilometers from the U.S.-Mexico border, there is indeed an increasing number of Chinese companies investing in upstream parts manufacturing plants seeking to supply large companies such as Tesla. But the report says that this investment is still in its infancy in terms of value, as the majority are smaller suppliers rather than large international brands.
It is reported that Tesla announced in March last year that it would invest in a gigafactory in Monterrey, and although it has not yet broken ground, many local Chinese auto parts suppliers in Mexico have been put into operation and are currently supplying Tesla factories in Texas and California.
"Politics is one thing, everybody talks about it. But on the flip side, when companies set up Mexican manufacturing facilities here, employ Mexican workers, and comply with rules of origin, they can certainly supply the U.S. market duty-free. Emmanuel Loo, deputy director of the Economic Agency of Nuevo León in charge of investment, said. Under the USMCA agreement signed during the Trump administration in 2020, companies building plants in Mexico are allowed to export to the U.S. tariff-free as long as they purchase a certain percentage of parts from the three North American countries.
A low-key influx of Chinese companies: they can't be scared away
Another article in the South China Morning Post series on the 5th mentioned that in 2023, China is not yet among the top 10 investors in Mexico. But from January 1 to March 15 this year, China rose to Mexico's fourth-largest source of foreign direct investment (FDI), according to Mexico's federal Ministry of Economy.
Since the fourth quarter of 2021, 30% of all foreign companies investing in Nuevo León have come from China, while 55% have come from the United States during the same period, Lo said. "We didn't have so many Chinese companies before. We used to have a lot of Koreans, Japanese, and Europeans. China is now the second largest investor in Monterrey. In the southwestern Mexican state of Jalisco, although the amount of Chinese investment is not high, Roberto Arechederra, director of the Jalisco State Department of Economy, believes that Chinese investment will increase at least tenfold in the next few years.
Percentage of Mexico's FDI source countries between January 1 and March 15, 2024 Credit: South China Morning Post
Chinese capital is becoming Mexico's fastest-growing source of foreign investment, but most of the Chinese companies investing in Mexico have a low-key stance. In Nuevo León, Lowe said, there are Chinese companies that have come to invest and build factories without notifying the local government, and "some of these companies were only discovered when our director of the labor department went to inspect them."
According to official statistics, in the first three quarters of 2023, the largest sources of FDI in Nuevo León were Argentina (US$1.39 billion), the Netherlands (US$557 million) and the United States (US$401 million), with only US$34.8 million of investment from China. But the actual figure may be much larger for plant managers and experts, the report said, as some Chinese companies use their overseas subsidiaries to invest in Mexico to avoid being labeled "Chinese" in the official record.
According to the Mexican Secretariat of the Economy, from 2018 to 2023, China's foreign direct investment (FDI) in Mexico amounted to US$2.3 billion. According to calculations by Enrique Dussel-Peters, a professor at the Department of Economics at the National Autonomous University of Mexico, this figure should be around $10 billion if the original source of the investment is traced.
According to the report, many managers of Chinese factories said they believed that as long as they strictly followed the USMCA agreement, they could avoid being troubled. Chen Yi, executive director of Jiangsu Hengli Brake Group's Mexican subsidiary at its plant in Monterrey, which is expected to come on stream this year, said: "From a business perspective, we can't be scared away. The Chinese can always find a way, as long as we comply with all the requirements of the USMCA, obtain a certificate of origin, and are ready to be inspected and reviewed. ”
"What I really want is for them to come to Mexico. Talking about BYD's plans to build a factory, Arecedra said, "For Jalisco, if they come, it will be a great opportunity – in whatever state, because we will have an industry where we can develop suppliers for them." ”
Expert: Mexico will not agree to discriminate against foreign companies
In this regard, there are also voices worried that in the face of the "two-way rush" between Chinese capital and Mexico, the United States will use all means to suppress it. Jorge Guajardo, a former Mexican ambassador to China and a partner at Dentons Global Advisors, a consulting firm, warned that the United States could easily use non-tariff barriers to make it more difficult for Chinese companies to prove they meet the rules of origin.
The report mentioned that during the negotiation of the USMCA agreement, the United States added a chapter that stipulates that the United States Labor Organization can require inspections of foreign factories in Mexico if they suspect labor violations. "So far, the provision has been used more as harassment than for actual enforcement. "I guess they're going to start targeting Chinese companies in Mexico." ”
The South China Morning Post said it coincided with the experience of a Chinese factory manager in Monterrey whose company was under antidumping and countervailing duty investigations by the United States. The manager, who asked not to be named, said: "If the U.S. really wants to target a company, then the USMCA agreement simply can't protect you." ”
The Financial Times reported earlier that the entry of Chinese electric vehicle companies into Mexico has attracted the attention of the United States, and the United States has "raised concerns" to Mexico about this. During U.S. Treasury Secretary Janet Yellen's visit to Mexico last December, the U.S. and Mexico reached an agreement on foreign investment vetting, in which the two sides agreed to establish a bilateral working group on foreign investment review to jointly "monitor foreign investment" and regularly share information about the screening process.
Although Yellen said that the agreement is not aimed at China but to ensure that the United States' "national security concerns" are taken into account on foreign investment, the move is widely seen as a "poison pill clause" for the United States to unilaterally pressure its allies to interfere in other countries' economic policies. Michael Dunn, chief executive of Dunne Insights, an Asia-focused automotive consultancy, said at the time that Chinese companies were "well aware that they were targeted."
Yellen and Mexico's finance minister attend an event together in Mexico City, Mexico, December 6, 2023 Photo credit: Visual China
But in the view of some Mexican officials and trade experts, such a screening mechanism is difficult to put into practice. Kenneth Smith-Ramos, a partner at Agon, an international consulting firm in Mexico and a former chief negotiator for Mexico's USMCA, has pointed out that the Mexican government would oppose such practices, which are seen as discriminatory against foreign companies.
Smith-Ramos stressed that Mexico "has an open investment climate" and that it would be difficult to implement or rationalize the exclusion of Chinese investment through the USMCA under current international trade rules. "How do you avoid a slippery slope if other countries start discriminating against North American products simply because they are made in North America, claiming that they endanger the national security of other export markets that are important to North America?"
It should be noted that given Mexico's geographical location, Washington's pressure on the Mexican government is still not ignored. About 85 percent of Mexico's exports go to the United States, and data released by the U.S. Commerce Department in February showed that Mexico surpassed China for the first time in nearly 20 years last year as the largest source of U.S. imports. Victor Gonzalez, senior counsel for China-Latin America legal affairs at Zhonglun W&D Law Firm in Beijing, went so far as to describe the economic relationship between China and Mexico as not truly bilateral, but a "trilateral relationship" with the United States.
However, it is also the close ties between the United States and Mexico that provide opportunities for Chinese companies. Eduardo Tzili-Apango, a professor of Chinese studies at Mexico's Metropolitan Autonomous University, said that the U.S. relies on low-cost products made in Mexico, but local Mexican industries are unable to provide the necessary elements of the supply chain, and inevitably rely on Chinese supply chains in technology-intensive areas such as electronic components, "In order to export more products to the North American market, we have to import more products from China."
At a press conference held by China's Ministry of Commerce on December 21 last year, a reporter mentioned that the United States has reportedly raised concerns about Mexico in recent days about the intention of Chinese electric vehicle companies to invest in Mexico. In this regard, Shu Jueting, spokesperson of the Ministry of Commerce of China, said that in recent years, many Chinese new energy vehicle companies have entered the Mexican market to carry out trade and investment cooperation to help local green development. Mexico has repeatedly stated that it welcomes more Chinese companies to invest in Mexico.
Shu Jueting stressed that the practical cooperation between China and Mexico is a matter between the two sovereign countries, and it is a normal business activity carried out by the enterprises of the two sides based on international rules and market principles, and no third party has the right to interfere. We urge the countries concerned to stop acts of economic coercion.
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