As the US and Mexico prepare for the next rounds of trade talks, China will figure prominently in the discussion, whether explicitly or as unmistakable subtext.
Mexico is likely to be more accommodating to US demands to restrict Chinese goods that compete with Mexican products, but it will need to weigh that objective against the needs of its own manufacturing sector.
And that’s not the only delicate balance the Mexican government will have to strike. It will need to decide how far to accommodate Washington’s concerns about China while remaining open to foreign investment from around the world and pushing back against an overly broad US definition of “transshipment.”
Mexican manufacturing has not been spared by “China Shock 2.0”
Mexico is the thirteenth-largest economy in the world, the second-largest in Latin America, and deeply integrated into the global economy. It is a large and open economy, with trade agreements with fifty-two countries and a financial regulatory regime that allows capital to flow freely. It is thus misleading to view Mexican trade policy strictly through the lens of its bilateral relationship with the US—and to assume that the tariffs Mexico imposed on China last year are simply a response to US pressure.
The truth is that Mexico faces the same “China Shock 2.0” confronting the rest of the world. The shock is driven largely by Chinese policies that constrain domestic consumption and provide state support to exporting firms on a scale well beyond what other countries could provide. At the recently concluded Group of Twenty (G20) meeting in Asheville, all participating countries except China called for “countries with excessive and persistent external surpluses [to] remove distortions that constrain domestic consumption and that result in an overreliance on exports for growth.”
In 2025, China had a current account surplus of 3.8 percent of GDP, the highest in sixteen years. As a percentage of GDP, that figure remains well below the peak of 9.8 percent reached in 2007. But the raw number, $735 billion, is 75 percent higher than in 2007. At the same time, China’s economy accounts for 20 percent of global GDP, twice its 2007 share. And because many Chinese exports are no longer destined for the US, the world’s largest consumer market, the pressure is increasingly being felt elsewhere.
As a result, the rest of the world is struggling to absorb Chinese production or compete with its products. European countries, for example, have been particularly hard hit and are engaged in trade negotiations with China. Mexico is feeling the same pressure. The country’s trade deficit with China has doubled in the past decade and now stands at roughly $120 billion a year. Talk to Mexican factory owners across a range of industries—from shoemakers in León to auto parts manufacturers and household appliance makers—and they frequently complain about overwhelming Chinese competition. These same factory owners are also lobbying their government.
At the same time, Mexico is facing growing fiscal pressure, with rising debt ratios and its investment-grade credit rating at risk. That makes tariffs an especially attractive source of revenue and difficult to unwind. And the tariffs have been effective in their stated purpose: imports from China and others fell sharply in the first half of 2026. Mexican tariffs on Chinese products thus reflect domestic political and economic realities—and not just US pressure.
Mexico’s interests align with US demands—up to a point
Notwithstanding its efforts at the G20, the US has so far struggled to lead a focused global campaign against Chinese government policies. The problem is partly one of credibility. The US administration nullifies its case against China by making similar and indiscriminate allegations against sixty other countries, representing nearly all US trading partners, through its Section 301 excess capacity investigations. The claim that these countries provide unfair state support to their manufacturing sectors is often met with disbelief (“wouldn’t that be nice?” is a typical rejoinder from Mexican business leaders), especially as they are themselves grappling with Chinese overcapacity.
But that does not mean Washington will find Mexico uncooperative. If the US pushes Mexico to prolong or apply additional tariffs on Chinese products, the Mexican government may prove receptive. Some form of tariffs on Chinese goods is likely to remain in place regardless of what happens in the next rounds of trade talks as many of the Mexican “concessions” are in fact in line with the government’s political and economic objectives. This is also partly because Mexico exports little to China compared with some European countries, limiting the force of potential Chinese retaliation.
But there are limits to Mexico’s willingness to impose tariffs because Chinese imports play an important role as inputs for domestic manufacturing: just over half of Mexico’s imports from China are intermediate rather than final goods, a higher share than in Canada or the US. The government has already imposed tariffs on many Chinese products used in manufacturing, particularly in the auto parts industry. But domestic manufacturers that rely on these inputs have pushed back, limiting both the level and scope of the tariffs. Some trade associations have lobbied for the tariffs; others have lobbied against them.
Mexico’s receptiveness to restrictions on Chinese trade may therefore differ from that of the rest of Latin America. On the one hand, Mexico is more commercially dependent on the US than most other countries in the region and thus more responsive to US pressure. On the other, it is Latin America’s only manufacturing export powerhouse, making the Mexican economy unusually dependent on Chinese intermediate inputs that feed into export industries. And for those industries, remaining price competitive in global markets is essential. (While Brazil imports a similar percentage of intermediate goods, it has a more closed economy.) Mexico is therefore likely to be more receptive to broad US pressure than its Latin American peers, but more resistant to restrictions on certain types of intermediate goods. The Mexican government will likely continue to exempt critical products from tariffs or apply lower rates to them. Even inputs spared from direct tariffs, however, may be affected in the medium term depending on the outcome of rules-of-origin negotiations.
While a certain degree of resistance to restrictions on Chinese inputs is prudent, it would put Mexico at odds with White House advisor Peter Navarro’s expansive view of “transshipment.” Traditionally, the term refers to using unintended trade loopholes or outright customs fraud to route products through a country that has a free trade agreement with the US, allowing them to enter the country without tariffs. Navarro’s definition, however, appears to go much further, implying that any use of foreign inputs in a manufacturing process would be considered “transshipment” of that good. Such a broad definition could implicate virtually any manufacturing country that exports to the US, including Mexico. Whether Navarro speaks for the Trump administration on this issue remains unclear.
The policy tradeoff is real. One government’s effort to protect inefficient industries is another’s policy to protect domestic sectors from unfair competition. The challenge is to design policies that are fair to both domestic consumers and producers—and to avoid tariffs that damage Mexican exports while providing little benefit to domestic industries. But finding that balance is easier said than done.
Welcoming foreign investment without compromising security
That’s true not just of trade, but of how Mexico approaches investment as well. The Mexican government needs to carefully calibrate its approach to Chinese capital and push back against overly restrictive demands in trade negotiations. It is unclear how prominent foreign investment policy will be in explicit talks around the United States-Mexico-Canada Agreement, but it is a consistent topic in bilateral economic discussions. Navarro’s “transshipment” report, for example, even goes beyond considering foreign inputs by treating a product as potentially suspicious if it contains “Chinese ownership or financing”, effectively bringing foreign investment into the equation. Under this logic, cars produced at a General Motors plant in Querétaro would be considered US rather than Mexican exports.
US warnings and threats to partners regarding Chinese foreign direct investment (FDI) are not new and often reflect valid concerns about potential national security threats. But it is important to distinguish between investments in critical infrastructure that could compromise national security and FDI linked to manufacturing supply chains. There can be exceptions, of course: investment in manufacturing products that collect sensitive data or otherwise handle sensitive technology, for instance, could raise the same security concerns.
The Mexican government has recently moved to address the first category. On August 30, Congress moved closer to passing legislation that would create a mechanism to screen foreign investment acquisitions for national security risks, similar to the Committee on Foreign Investment mechanism in the US. The effort followed an agreement that former Treasury Secretary Janet Yellen and her counterpart, Rogelio Ramírez de la O, signed in December 2023 to work together on the development of such a mechanism. US interest in potentially sensitive investments in the region—including ports, border infrastructure, and sensitive technology—predates and will outlast the Trump administration. Mexico currently lacks a fully developed mechanism to block particularly problematic investments, many of which are initiated by state or local governments with limited visibility from Mexico City. Passing such a law would be a substantively positive step and would give US negotiators greater confidence in trade talks.
But for most manufacturing investment, Mexico should maintain a mostly permissive regime. Strengthening North American supply chains will require attracting suppliers from around the world because Mexico cannot build all the necessary local capacity from scratch. Bringing more of the production process to North America will naturally require new investment from foreign suppliers. Such investments often bring positive spillovers and may ultimately do more to develop local suppliers than arm’s-length imports alone. If Mexico’s goal is to “move up the value chain,” attracting those suppliers should be part of its development strategy. Chinese FDI makes up a relatively small share of total FDI—no more than 10 percent, even accounting for likely underreporting—although its share of greenfield investment has likely grown in recent years.
Moreover, Mexico’s tariffs may have consequences beyond China. Although Beijing is the primary target, tariffs on countries without trade agreements with Mexico can also affect major sources of FDI, including South Korea and Taiwan. The government should consider whether those tariffs could have unintended effects on investment from those countries. Policymakers can also advance the broader goal of attracting investment by restoring a government investment promotion office. Without a federal office or agency, wealthier states like Querétaro, Nuevo León, and Chihuahua can send representatives to trade shows in East Asia, while poorer and less sophisticated Mexican states do not. That imbalance runs counter to the government’s goal of fostering greater economic convergence across regions.
There is one major exception to a generally welcoming stance on manufacturing FDI, although it does not necessarily call for a policy response. In sectors considered sensitive by the US government, products manufactured by a Chinese parent company may be banned from the US market. That restriction can make building a plant in Mexico commercially unviable, since the domestic market is too small to absorb the investment’s output. In such cases, the Mexican government has limited influence over the outcome, because the company itself can decide whether the investment makes business sense—as BYD apparently did in 2025 when it halted plans to build a factory in Mexico.
Still, a prudent investment policy would protect Mexico from genuine national security risks while welcoming foreign capital that can advance the country’s economic development.
Phil Lovegren is a nonresident senior fellow at the Atlantic Council’s Economic Statecraft Initiative and is currently director for strategy and international regulatory affairs at Banca Mifel.
Ernesto Stein is distinguished university professor of public policy at the School of Government and Public Transformation at Tec de Monterrey, a member of the US-Mexico Binational Task Force on Economic Security and Competitiveness convened by the Atlantic Council’s Adrienne Arsht Latin America Center, and director of the BBVA-Tec Center for Trade Policy and Global Value Chains for North America.
Housed within the GeoEconomics Center, the Economic Statecraft Initiative (ESI) publishes leading-edge research and analysis on sanctions and the use of economic power to achieve foreign policy objectives and protect national security interests.
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Image: Former Mexican President Enrique Peña Nieto meets with Chinese President Xi Jinping in Sanya, China. Source: REUTERS/Ed Jones/Pool.