By Judith Álvarez
The election of a new head of state, particularly one who received a majority mandate, typically ushers in an era of energy and renewal – a sense that change is afoot and there is just cause for optimism.
There was indeed some of that across Mexico in early June when Claudia Sheinbaum was brought to power in a landslide victory to become Mexico’s first woman president. A former mayor of Mexico City and career engineer, Sheinbaum rose through the ranks of the incumbent Morena party with the support of outgoing president Andrés Manuel López Obrador or AMLO.
It is important to mention that industry and political observers on both sides of the Rio Grande have long been concerned about the impact of Morena’s economic policies on the viability of Mexico as an integral trade partner. This has become particularly acute in recent years as more U.S. companies look to Mexico as an alternative to China.
Mexico has now replaced both China and Canada as America’s largest trading partner. In 2023, Mexico imported $475.2 billion in U.S. goods and exported $322.7 billion to the U.S. The port of Laredo is now the most active port in the United States as trade with Mexico climbed 2.4% in 2023 and U.S. trade with China fell precipitously by 16.7%.
The two countries now have an interdependent relationship. U.S. companies are increasingly relying on Mexico’s low-cost labor to carry out work that was once performed in Chinese factories. But Mexico now relies on the U.S. heavily for its export potential. In fact, 82.7% of all of Mexico’s exports go to the U.S.
Choosing sides
But it’s not just export performance that is going to be of consequence or contention to U.S. policymakers. Since the onset of the U.S.-China trade war in 2018, China’s exports to Mexico have shot up from $83.5 billion to $119 billion in 2022. That’s not a coincidence. Chinese producers have been taking advantage of Mexico’s robust manufacturing sector to circumvent Washington’s tariffs against China and leverage duty savings available through the USMCA.
These increases in Chinese imports into Mexico have caught the eye of U.S. policymakers who are increasingly worrying about Chinese steel making it into the U.S. duty free. China’s investment is still only about 25% of what the U.S. brings into Mexico, but the rapid rise of China’s influence and participation in Mexico’s economy has been cause for concern in the U.S.
Recent years have seen Washington take a kid-gloves approach to Mexico. The Biden administration has not publicly taken Mexico to task over USMCA transgressions, such as trade union reforms, energy-sector liberalization (or lack thereof), and ongoing agricultural disputes. A return of Donald Trump to the White House and Republican led Congress would likely see a significant change in U.S.-Mexico relations, one that is fraught with tension. Sheinbaum and Trump are diametrically opposed from a political standpoint. Each represent a modern brand of populism but on opposite ends of the political spectrum. What they have in common is a desire to protect their domestic industries.
But the reality for Sheinbaum and Morena is that the period of cordiality may be coming to an end irrespective of who resides at the White House. Both the Biden administration and Trump campaign have already taken Mexico to task publicly during AMLO’s lame-duck period. While Biden has preferred the more prescriptive approach, Trump has publicly stated his support for a 100% tariff on Chinese-made electric vehicles coming from Mexico. That’s in addition to a 10% universal tariff. And it’s not just the presidential hopeful himself. Republican senators like Marco Rubio have been calling for a $20,000 flat tariff on Chinese vehicles entering the U.S. And it’s important to remember that back in 2019, Trump had threatened to slap a 5% tariff on Mexican goods entering the U.S. unless the Mexican government acted to stem the tide of migrants arriving to America’s borders. That migrant crisis has since only intensified and is one of the top issues for U.S. voters in the upcoming election.
The AMLO administration has reportedly already begun scaling back incentives, such as tax breaks, to Chinese automakers who now represent about a third of Mexico’s auto retail market. Those are the sorts of difficult choices Sheinbaum will face as she takes the helm of a Mexico that must wean itself from its reliance on spending to curry favor with the electorate. The level of debt in the country has left Sheinbaum with little left to spend, forcing her to rely on market forces to improve quality of life for Mexicans. That includes better jobs, better working conditions and better living conditions.
Neighborly competition
Mexico is undoubtedly having its moment in the sun, but the decisions of today’s policymakers will determine how long that moment will last. Mexico’s shared border with the U.S.; its inclusion in the USMCA and the robust manufacturing capability has made it a natural locale for the establishment of nearshored production. But competition is on the horizon.
A bipartisan group of senators has already floated the concept of an Americas Act, which would essentially see liberalized trade expanded into Central and South America, as well as the Caribbean. The regional network of free trade is being touted as a counterweight to China’s Regional and Comprehensive Economic Partnership (RCEP), a trade deal in Asia Pacific that includes one-third of the world’s population and one-third of its GDP. This has the potential to siphon investment away from Mexico and into neighboring countries that could become easily accessible through improved roadway and port infrastructure. To capitalize on the here and now, Mexico’s government must take actions that appeal to U.S. investors.
Given the previous Trump administration’s discomfort with multilateralism, there’s good reason to believe such a trade deal may never materialize. At the same time, a new Trump administration will be looking for a viable counterweight and alternative to China’s growing hegemony across the Pacific. While the previous Trump administration and current Trump campaign have been far more focused on China as an economic threat than the current Biden administration, the latter has begun to show a discomfort with China’s growing influence abroad and will be looking to help U.S. industry reduce its dependence on Chinese imports. An Americas deal may prove to be just the ticket.
Physical Infrastructure
One of the areas investors will be watching closely is Mexico’s investment in trade-facilitating infrastructure. Mexico currently spends about 1.5% of its GDP on infrastructure enhancements. That’s a far cry from the 5% some experts suggest is necessary to meet the needs of the nearshoring movement.
The inadequate investment has resulted in congestion at critical border crossings and seaports, such as Mexico’s bustling Manzanillo port. And while 350 new industrial projects were launched in 2023, a report by international financier Banco BASE shows Mexico is only getting a slice of the nearshoring pie with between 10-20% of potential nearshoring capital.
Critical modernization of infrastructure will make Mexico stand out much more to potential U.S. investors. A joint study by the Atlantic Council and Hunt Institute for Global Competitiveness shows a 10-minute reduction in border wait times could translate to an additional $26 million in commercial cargo entering the U.S. each month or $312 million a year. Those are the sorts of numbers to which U.S. commercial investors pay close attention.
Out of energy
It doesn’t bode well for a country’s investment attractiveness when its capital city finds itself in a water crisis. To be fair, the shortage of water in Mexico City since early 2024 was not an outcome of poor government policy, but rather a confluence of factors, including topography, urban development and climate change. And most investors aren’t targeting the sprawling metropolis for expansion of manufacturing capacity.
But the water crisis in Mexico City is a reminder of the fragility of the country’s energy infrastructure. Water is critical to production processes – be it in Mexico City or in the borderlands. But water aside, more than 70% of Mexico’s energy is generated by gas, creating potential for shortages and blackouts that could disrupt industrial production. As nearshoring takes root, there will be more demand on an energy sector that remains wholly nationalized and restricted from entry by both domestic and foreign investors. This has been flagged as not only a critical consideration for commercial and industrial investors, but as a point of contention in Washington where the U.S. Trade Representative’s office has flagged the practice as being in contravention to the USMCA. There is little indication, at this point, to believe Mexico’s incoming government will change course.
Security
While border security has been the primary topic of concern for U.S. policymakers, the importance of security within Mexico itself isn’t lost on business decision makers, particularly those looking to establish consistent transportation routes in and out of the country. Commercial vehicles continue to be misappropriated by organized crime, which has aggressively targeted industrial and commercial facilities for extortion. The concerns aren’t just physical in nature. Much like China, U.S. firms are expressing fears around data security and leaks of proprietary corporate information.
The issue of security will continue to serve as a liability to the attractiveness of the country as a source of production. This is particularly true for producers of high-end consumer goods, such as electronics or designer garments, or sensitive goods such as pharmaceuticals or chemicals.
Trade Hub
Perhaps one of the biggest draws for investors will be the flexibility Mexico offers as not only a production center but a broader hub of global trade. Mexico boasts free trade agreements with more than 50 countries around the world, including the European Union, 10 countries in Latin America and 10 Pacific Rim countries. This offers U.S. companies the ability to import critical components and materials into Mexico duty free for assembly or further manufacturing within Mexico before they’re exported to the U.S. Provided the changes to the product are substantial enough to meet customs compliance requirements under the USMCA and contain the prescribed amount of North American content, the goods could reach the U.S. duty free.
But as U.S. companies leverage Mexico as an alternative to China, they will need to scrutinize their supply chains more than ever. Customs officials are on the lookout not only for illicit goods, but also for goods made for or by sanctioned parties, the list for which is growing weekly.
A watchful eye
With the U.S. election increasingly imminent, corporate decision makers will want to watch closely several key developments as they consider the establishment or expansion of their production.
- Shifts in trade relations between Washington and Mexico City. This will become particularly important in the event Donald Trump reclaims the White House as his campaign has already struck a confrontational tone.
- Emergence of new grievances with Mexico from the U.S. Trade Representative or Department of Commerce, both of which have the power to effect change in trade policy. As an extension, close attention should be paid to the extent to which those grievances find their way onto the agenda of the first USMCA review in 2026.
- The migrant/border crisis in the U.S. and how this impacts diplomatic ties between the two countries. This issue has previously tainted diplomatic relations over trade terms, though stopped short of effecting any actual change.
- Changes to Mexico’s energy policies and its openness to private investment, particularly from U.S. investors. This will represent a sea change in policy by Mexico’s government and a tell-tale sign that the government is opening up the country to greater regional alignment.
- Infrastructure announcements coming out of Mexico, and particularly those that involve partnership with private investors (3P projects).
Despite its challenges, U.S. companies looking for an alternative to China will continue to be drawn in by Mexico’s geographic proximity, its duty-free trade and its sturdy manufacturing sector. It will be up to Mexico’s new government to fully harness the opportunity through critical reforms in industrial and security policies and modernization. That will require a departure from the outgoing administration’s policies and a roll of the dice on how the electorate will respond.
Judith Álvarez has broad experience in import management and export operations in Mexico. She holds extensive knowledge of IMMEX regulations, certifications, origin determinations of various free trade agreements, duty-minimization analysis and HTS classification. In her daily work, she manages foreign trade consulting services for key clients and is responsible for analysis of new regulations applicable to import/export operations in Mexico, the U.S. and Latin America.