Author: Zhe (C.Z.) Che, JD candidate / LLM ’22, Indiana University Maurer School of Law. Advised by Dr. Miguel Angel Marmolejo, Fulbright-Garcia Robles Chair at Indiana University.
China and the United States have been locked in a trade war since 2018.[1] Judging from the current international situation, this war without fire will continue in the foreseeable future. As the two largest economies in the world, China and the US are bound to have a huge impact on the world economy because of the contradictions and conflicts between them. For different countries, the impact of the Sino-US trade war is different. For some, the impact has been negative. But for Mexico, the trade war has brought more export opportunities.[2] This has also indirectly attracted more and more foreign investment into Mexico.[3] Among the many foreign investments, the investment from China is increasing year by year.[4]
The main reason for the above phenomenon is that the Chinese government has taken countermeasures against a series of trade sanctions imposed by the US government. The economic and trade conflicts between China and the US are mainly reflected in three aspects: the imposition of tariff barriers or discriminatory subsidies, the restriction of technology exports, and the establishment of international or regional economic and trade alliances. According to a 2023 US Congress report, at least in the next five to ten years, the US will try to contain and block China’s development by three means.[5]
First, the US will use its dominant position in the world trading system and its influence in the WTO to prevent Chinese goods from entering the US market. For example, by accusing China of abusing government subsidies and forcing technology transfer in violation of WTO rules, the US can claim reasonable countermeasures against China, thereby imposing tariffs on China’s advantage goods (such as photovoltaic products). For another example, the US can completely cut off imports of some Chinese products, such as 5G technology and electric vehicles, by declaring them a threat to the national security of the US and other reasons.[6]
Second, the US will also slow down China’s development in certain key areas by restricting the export of relevant core technologies. Such as chip manufacturing technology, artificial intelligence technology, and so on. This, in turn, has forced China to seek more opportunities in other countries and regions outside the US market (such as Southeast Asian markets, African markets, and Latin American markets represented by Mexico) to fill the trade deficit.[7]
Finally, the US will also reduce China’s influence in the international economic and trade system by transferring production chains to other countries and establishing regional and international economic and trade alliances. Examples include the establishment of cooperation with Vietnam on semiconductors and AI, the establishment of cooperation with Taiwan on chip development and manufacturing, and the prevention of unfavorable trade agreements between China and Mexico through specific clauses of the United States-Mexico-Canada Agreement (USMCA).[8]
In response to the US containment policy, China has also taken corresponding countermeasures.[9]
The first counter measure is to reduce economic dependence on the US. The means is to increase exports to the target countries, improve the overall domestic industrial chain, and increase scientific research funds.[10]
Second, in response to the economic coercion of the US, China also has corresponding countermeasures, such as restricting the export of photovoltaic products and LiDAR technology.[11] However, compared to the US, China has fewer areas of technological advantage, making it difficult to have an impact on the US.
Third, China is also actively adding its own allies. In recent years, the economic and trade cooperation between China and Europe has been gradually developing. At the same time, China has been advocating the Belt and Road policy to increase its economic allies in the Asia-Pacific region. All this has had some success.[12] Also, it cannot be ignored that China is gradually strengthening economic cooperation with Mexico and further expanding its investment in Mexico.
Despite both China and the US still trying to maintain dialogue and economic ties,[13] in general, the economic and trade relationship between China and the US is “decoupling” and may never return to its previous status. The future world is likely to form a new “bipolar” order.
However, it is impossible to completely abandon economic globalization or engage in a total “decoupling.” In fact, Henry Kissinger remarked that Sino-US relations will depend on “an understanding that the two countries have a unique ability to bring peace and progress to the world, but they also have a unique ability to destroy the world if they’re not together.”[14]
Therefore, emerging developing countries, if they play their cards right, will benefit from the rivalry between China and the US, at least for the time being.
As one of the aforementioned measures, the US is working to shift the entire industrial chain from China to Mexico. Although the North American Free Trade Agreement (NAFTA) was established in 1994 between the US, Canada, and Mexico, it did not bring full economic benefit to Mexico because of the existing close cooperation between China and the US.[15]
However, after the United States-Mexico-Canada Agreement (USMCA) came into force in 2020, and the China-US relations deteriorated, Mexico’s economy began to soar. As a result, Mexico’s industrial worker wages have risen sharply, and this has strengthened available income for spending by Mexican consumers.[16]
At the same time, China also saw the huge potential of the Mexican market and began to invest heavily in Mexico, and through the signing of trade treaties to provide legal protection for related investments.[17] This increase in investments is partly due to the attractiveness of the Mexican market, and partly to circumvent US economic sanctions by producing locally.[18]
Among all the investments, the most famous one is the Hofusan Industrial Park, jointly developed by the Holley Group (China), the Futong Group (China), and the Santos family in Mexico. It covers an area of 8.47 square kilometers and is located 20 kilometers north of Monterrey, N.L. Mexico, and just over 200 kilometers from Laredo, USA.[19]
Due to the great success of Hofusan Industrial Park and the increasingly close economic and trade cooperation between China and Mexico, Mexico has gradually become the most favored overseas investment destination for Chinese enterprises.
However, for Chinese enterprises that come to Mexico to invest, although the investment opportunities are extensive, it is also accompanied by crisis.[20] The biggest threat to Chinese companies in Mexico, perhaps, is interference from the US government.
The most famous case was the failure of China Railway Construction Company (CRCC) in Mexico. In 2014, CRCC and China South Locomotive & Rolling Stock Corporation Limited (CSR) jointly won the bid to build a high-speed rail line between Mexico City and Queretaro, a city about 200 hundred miles north of Mexico City. However, the project was later canceled amid allegations of government bribery.[21] As a result of the failure of the project, there is still no high-speed rail link between the two cities. It is alleged that the reason behind the aborted project is the US sanctions against CRCC.[22]
This year, after BYD Auto, one of China’s largest manufacturers of new energy vehicles, announced that it would build a factory in Mexico and made promises to the local government to transfer technology and provide vast numbers of jobs, the US government intervened. The US officials are trying to put pressure on the Mexican government to remove incentives for Chinese EV manufacturers and suspend further cooperation in the future. When answering the reason why the US is doing this, a White House spokesperson once again presented the classic theory: electric vehicles pose threats to national security.[23]
Another consideration for Chinese companies investing in Mexico comes as a result of the USMCA. Although the USMCA purports to promote “mutually beneficial trade leading to freer markets, fairer trade, and robust economic growth in North America,”[24] it limits Mexico’s ability to further cooperation with China. Article 32.10 of the USMCA requires “any party intending to negotiate a free trade agreement with a non-market country to inform the other parties, provide information, allow review of the full text, and face potential termination of the USMCA if they proceed with the agreement.”[25] Because the US has designated China a non-market country, this likely blocks further development of the Sino-Mexico economic relationship. Therefore, any Chinese company should be mindful of the potential risks before entering Mexico. In addition to carefully studying the specific provisions of the USMCA for each area of industry, Chinese investors should engage a professional legal service team that understands the North American legal ecosystem to achieve a safe landing in the Mexican market.
[1] Trump’s Trade War With China Is Officially Underway, N.Y. Times, Jun 5, 2018. https://www.nytimes.com/2018/07/05/business/china-us-trade-war-trump-tariffs.html, Accessed: Jun 18, 2024.
[2] Eugenio Cerutti, Gita Gopinath, Adil Mohommad, The Impact of US-China Trade Tensions, IMF Blog, May 23, 2019. https://www.imf.org/en/Blogs/Articles/2019/05/23/blog-the-impact-of-us-china-trade-tensions, Accessed: Jun 19, 2024.
[3] Foreign direct investment, net inflows-Mexico, World Bank. https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?locations=MX, Accessed: Jun 19, 2024.
[4] Mia Nulimaimaiti and Ralph Jennings, China has made Mexico a premier investment destination. Is it a US detour, or something more? South China Moring Post, Feb. 3, 2024. https://www.scmp.com/economy/china-economy/article/3250695/china-has-made-mexico-premier-investment-destination-it-us-detour-or-something-more, Accessed: Jun 19, 2024.
[5] The Select Committee on the Strategic Competition between the United States and the Chinese Communist Party, Reset, Prevent, Build: A Strategy to Win America’s Economic Competition with the Chinese Communist Party (Dec. 12, 2023), 2-3, https://selectcommitteeontheccp.house.gov/sites/evo-subsites/selectcommitteeontheccp.house.gov/files/evo-media-document/reset-prevent-build-scc-report.pdf, Accessed: May 5, 2024.
[6] Ibid.
[7] Ibid.
[8] Ibid.
[9] 宋国友，美国对华经贸政策与中美经贸关系新趋势，P62-64，国际问题研究（2023年第2期）. [SONG Guoyou, US Trade Policy toward China and Uncertainties in China-US Economic and Trade Relations, 62-64 (China International Studies, No. 99, March/April 2023)](Mainly discuss the policy of countermeasures against the US economic sanctions against China). https://www.ciis.org.cn/gjwtyj/qkml/202304/P020230413580403087035.pdf, Accessed: May 5, 2024.
[10] Ibid, P62.
[11] Ibid, P63.
[12] Ibid, P64.
[13] U.S. Department of the Treasury, Statements from Secretary of the Treasury Janet L. Yellen on Announcement of New U.S.-China Initiatives Following Meeting with Vice Premier He Lifeng of the People’s Republic of China, Apr. 6, 2024, https://home.treasury.gov/news/press-releases/jy2232, Accessed: May 5, 2024.
[14] Li Rui, Peaceful, cooperative U.S.-China relationship essential for world says Kissinger, Xinhua, Oct. 25, 2023. https://english.news.cn/northamerica/20231025/2e255838790945b181efdebb151e5db7/c.html, Accessed: May 5, 2024.
[15] Paul Wiseman, Mexico Overtakes China as Leading Source of U.S. Imports, Industrial Distribution, Feb. 8, 2024. https://www.inddist.com/supply-chain/news/22886435/mexico-overtakes-china-as-leading-source-of-us-imports, Accessed: May 5, 2024.
[16] Daniel Zaga and Alessandra Ortiz, Mexico Economic Outlook, 2023, 2 (Deloitte Global Economics Research Center). https://www2.deloitte.com/us/en/insights/economy/americas/mexico-economic-outlook.html, Accessed: May 5, 2024.
[17] ACUERDO ENTRE EL GOBIERNO DE LOS ESTADOS UNIDOS MEXICANOS Y EL GOBIERNO DE LA REPUBLICA POPULAR CHINA PARA LA PROMOCION Y PROTECCION RECIPROCA DE LAS INVERSIONES [Agreement on Mutual Promotion and Protection of Investment between the Government of the People’s Republic of China and the Government of the United Mexican States, signed in Beijing, China, on Jul. 11, 2008, between China and Mexico]. https://dof.gob.mx/nota_detalle.php?codigo=5093558&fecha=05/06/2009#gsc.tab=0, Accessed: May 5, 2024.
[18] Peter S. Goodman, Why Chinese Companies Are Investing Billions in Mexico, N.Y. Times, Feb. 8, 2023. https://cn.nytimes.com/business/20230208/china-mexico-trade/, Accessed: May 5, 2024.
[19] Portal of the HOFUSAN Industrial Park, http://hofusan.net/en/, Accessed: May 5, 2024.
[20] Joshua P. Meltzer, The US, Canada, and Mexico need a more coordinated approach to their trade relationships with China, Brookings, June 7, 2024. https://www.brookings.edu/articles/the-us-canada-and-mexico-need-a-more-coordinated-approach-to-their-trade-relationships-with-china/, Accessed: Jun. 19, 2024.
[21] China’s CRCC to Receive Compensation from Mexico for Cancelling Rail Project, Railway Technology, May 21, 2015. https://www.railway-technology.com/news/newschinas-crcc-to-receive-compensation-from-mexico-for-cancelling-rail-project-4583611/?cf-view, Accessed: May 5, 2024.
[22] America’s China Challenge in Mexico, The Hamiltonian. https://hamiltonian.alexanderhamiltonsociety.org/security-and-strategy/americas-china-challenge-in-mexico/, Accessed: May 5, 2024.
[23] Diego Oré, Mexico, Strong-armed by the U.S., Will Stop Incentivizing Chinese EV Production, Reuters Apr. 18, 2024. https://www.fastcompany.com/91108712/mexico-strong-armed-u-s-stop-incentivizing-chinese-ev-production, Accessed: May 5, 2024; Biden Calls Chinese Electric Vehicles a Security Threat, N.Y. Times, Feb. 29, 2024.
https://www.nytimes.com/2024/02/29/us/politics/biden-chinese-electric-vehicles.html, Accessed: Jun. 19, 2024.
[24] Modernizing NAFTA into a 21st Century Trade Agreement, UNITED STATES–MEXICO–CANADA TRADE FACT SHEET.
https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/fact-sheets/modernizing#:~:text=The%20new%20United%20States%2DMexico,economic%20growth%20in%20North%20America, Accessed: Jun. 19, 2024.
[25] Mario Mancuso and Ivan A. Schlager, The USMCA Enters Into Force: Five Things to Know About the Trade Agreement, 3, Kirkland & Ellis, Jul. 8, 2020. https://www.kirkland.com/publications/kirkland-alert/2020/07/usmca-enters-into-force, Accessed: May 5, 2024.
