Solving the China Challenge in Mexico
The United States should make its southern neighbor not just a large trading partner, but also a truly strategic one.
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Mexico has lately assumed a role of paramount importance to every American: the No. 1 trade partner of the United States, a critical partner in curtailing migration at the U.S. southern border, and the country in which deadly fentanyl is synthesized using precursor chemicals imported from China and then trafficked into U.S. communities.
Yet Mexican officials who laud trade between the two countries also make comments in the same breath indicating that Mexico would look to China if there were disagreements with the United States on trade matters. Outgoing Foreign Minister Alicia Bárcena recently said “Mexico will have to look for other paths” if tensions rise with the United States and extolled China as a “country that is constantly looking out for Mexico.” Juan Ramón de la Fuente, President-elect Claudia Sheinbaum’s pick for foreign minister, recently told El País, “we are going to have the opportunity to review and strengthen relations … with China.”
With a joint review of the U.S.-Mexico-Canada Agreement (USMCA) on the horizon in 2026, these comments could not come at a worse time. The economic integration of North America is a key source of U.S. economic and political power. A Mexico imbued with the theory of nonalignment and openly courting a greater Chinese presence would debilitate Washington’s ability to compete effectively with Beijing.
The historic victory of Sheinbaum and outgoing Mexican President Andrés Manuel López Obrador’s Morena party in the June elections—and the result of the U.S. presidential election in November—will set the dynamic for the countries’ bilateral relations through the rest of the decade. In exchange for actions that address U.S. concerns related to China, the next U.S. administration should offer Mexico a positive agenda of economic incentives that can supercharge nearshoring investments, create jobs in both countries, and bolster North American supply chain security, while Sheinbaum should double down on her campaign commitment to North America. This partnership should rest on a foundation of continued cooperation on migration and meaningful progress by the Mexican government against powerful cartels.
In short, at this pivotal juncture, leaders in Washington and Mexico City should not turn away from each other but instead upgrade the relationship to a strategic partnership.
there are three key areas in which the United States faces a growing China challenge in Mexico that stand in the way of a deeper partnership. These are foreign direct investment, critical infrastructure, and the fentanyl crisis.
In 2023 alone, Chinese companies announced plans to invest $12.6 billion, combined, in Mexico. Over the next two years, members of the Mexican Association of Private Industrial Parks expect that 1 in 5 new customers will be Chinese companies. More important than the top-line figures, however, are the specific Chinese companies and the sectors where they are investing. Given Mexico’s strategic importance, a growing Chinese presence in strategic industries—such as electric vehicles, mining, ports, technology, and telecommunications—could undermine U.S. economic and national security interests.
Potential plans by BYD and other leading Chinese electric vehicle (EV) manufacturers to build factories in Mexico, ostensibly to produce cars for the Mexican market, are receiving significant attention north of the border. The industry is a strategic priority for Beijing, which has poured hundreds of billions of dollars of subsidies into EVs that now have a considerable price advantage over Western automakers. Imports of Chinese EVs manufactured across the border in Mexico would be able to evade the United States’ Section 301 tariffs on EVs coming from China, which the Biden administration recently increased to 100 percent. (Former President Donald Trump, now officially the Republican Party’s presidential nominee, has promised to go even further and impose a 100 percent tariff on EVs made in Mexico by Chinese companies, if elected.)
Additionally, at least seven Chinese companies sanctioned by the United States for supporting Beijing’s military and intelligence apparatuses operate in Mexico. The most notable of these is telecommunications giant Huawei, which has a significant presence in Mexico’s 4G and 5G networks despite a global U.S. campaign against the company. The Mexican government is open about its collaboration with Huawei—the Foreign Ministry recently signed an agreement with Huawei Mexico to promote women in the digital economy, with officials appearing alongside the Chinese ambassador to make the announcement. As Mexico’s digital economy matures and the country’s telecommunications networks catch up to those of its northern neighbor, the pervasive presence of Huawei, China Unicom, and other firms with strong ties to the Chinese Communist Party (CCP) could create significant security concerns for U.S. companies seeking to invest or expand in Mexico and hamper bilateral cooperation on cross-border cyber threats.
Another U.S.-sanctioned company operating in Mexico is China Communications Construction Company (CCCC). A major player in China’s Belt and Road Initiative investment projects around the world, the state-owned CCCC helped construct a section of the Tren Maya, the Yucatan intercity railway project that has become one of López Obrador’s signature infrastructure projects. CCCC also recently built new port infrastructure in Ensenada and Veracruz for the Hong Kong-based Hutchison Ports holding company.
Hutchison is part of a global network of Chinese-controlled ports that are believed to provide Beijing with significant maritime intelligence; it is required to cooperate with China’s intelligence services and provide support to Chinese defense assets. Hutchison owns terminals at four of Mexico’s five largest ports, including Manzanillo, and two-thirds of container capacity at Lázaro Cárdenas. These ports are on the receiving end of a massive surge of container traffic from China, which has raised concerns that Chinese companies are using Mexico to circumvent U.S. tariffs.
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The CCP also plays a major role in the supply chain and monetary flows that sustain the trafficking of fentanyl from Mexico into the United States. A recent U.S. congressional report concluded that the Chinese government provides export subsidies for several precursors used by Mexican drug cartels to manufacture the drug. The U.S. Drug Enforcement Administration assesses that Chinese chemical companies provide the Sinaloa and Jalisco cartels with most of their fentanyl precursors. Many of these precursors enter Mexico through Manzanillo and other Pacific ports. Recent U.S. indictments also indicate that the cartels can pay for these precursors with U.S. street profits laundered through Chinese criminal organizations operating in the United States.
Addressing China’s growing activity and influence in Mexico will likely be a major bipartisan priority ahead of the joint review of USMCA scheduled for 2026. Given the long list of trade and nontrade issues in the bilateral relationship, the next U.S. administration is unlikely to agree to a 16-year extension without first obtaining a major commitment from Mexico or changes to USMCA itself. To that end, Washington should put forward concrete proposals to address Chinese investment in key sectors as well as critical infrastructure, tariff evasion, the fentanyl supply chain, and other challenges.
The USMCA has proven itself to be a resilient and modern trade agreement that has catapulted Mexico to become the United States’ No. 1 trade partner. Addressing the China question could be framed by the next administration as an opportunity for Mexico. U.S. policymakers should put it bluntly: Does Mexico want to take the leap from being a large trade partner of the United States, much like any other, and instead become a truly strategic one?
Fundamentally, being a strategic partner of the United States—a category to which only a handful of countries rise—implies more alignment on the question of China. This does not mean a wholesale Mexican endorsement of Washington’s China policy but, instead, a China-Mexico relationship that does not undermine shared core interests and embraces North America first.
Mexico’s continued cooperation in stemming the flow of migrants to the U.S.-Mexico border—and demonstrable progress by the Sheinbaum administration in degrading the territorial control and power of the cartels—will be crucial elements of any upgraded partnership. The U.S. government should work with Mexico to train; equip; and support Mexico’s police forces, National Guard, and military so they can implement a new security strategy successfully. Several major bilateral trade disputes that threaten the integrity of USMCA and create uncertainty for potential investors, including on energy, also need a resolution.
Mexico should work with the United States to take three steps to address U.S. concerns about China’s growing activity and influence.
First, the two countries should implement a comprehensive U.S.-Mexico counter-fentanyl initiative focused on the flow of precursor chemicals and laundered funds from China to transnational criminal organizations in Mexico. As part of this initiative, Mexico should provide the U.S. government with full access to seaport manifest and customs data to track potentially illicit shipments and cargo mislabeling. Mexico should establish an enforcement regime that holds chemical companies accountable for the final destinations of their products and punishes shipping companies that transport improperly labeled fentanyl precursors.
Additionally, joint operations off Mexico’s Pacific Coast by the Mexican Navy, U.S. Coast Guard, and U.S. Navy can jointly interdict vessels suspected of carrying illicit cargo while respecting Mexico’s sovereignty.
Next, the two countries could make screening of foreign investment for threats to national security a North American standard. Since the United States (CFIUS) and Canada (Investment Canada Act) already have a process for reviewing foreign investments, Mexico could agree to develop an equivalent process according to its own laws. The United States and Canada can provide technical assistance in furtherance of this effort, and the three USMCA partners could establish a mechanism to share information on threats from nonmarket economies in key sectors and critical infrastructure, such as ports, as appropriate.
This would provide more transparency to the United States regarding Chinese investment in Mexico and go much further than the Biden Administration’s proposed bilateral working group focused on foreign investment review.
Finally, the three USMCA partners should come to a common understanding that each partner can take the steps that it believes are necessary to counter economic security threats from China and other nonmarket economies while preserving other obligations under the agreement. This step would increase the opportunity for North American action against Chinese economic practices, such as the recent U.S.-Mexico joint action on aluminum and steel imports.
The next U.S. administration must pursue positive inducements. The offer of strategic partnership should proceed by conducting a sector-by-sector analysis and identifying core areas where Mexico could replace China in global supply chains, which could include automobiles, electronics manufacturing, semiconductors, pharmaceutical supply chains, and critical minerals, to name a few.
To mobilize investment in these areas, the president should make a determination that expanding Development Finance Corporation (DFC) investments in Mexico advances U.S. national security interests, leveraging that decision to mobilize catalytic funds for U.S. companies and investment funds in Mexico. The DFC could also invest in special infrastructure funds meant to lubricate private sector investment in electricity transmission, transport links, water security, and ports. These funds could help to channel investment to Mexico’s underdeveloped south—a Morena party priority.
The United States should also push for more investment from international financial institutions (IFIs), such as the Inter-American Development Bank and the World Bank as well as the binational North American Development Bank. The economic uncertainty generated by Mexico’s policy direction under Morena makes the availability of funds at IFIs once again necessary to keep private investment from receding in critical sectors. The United States should limit, as much as possible, any IFI-backed investment in Mexico that involves Chinese companies or banks. Regarding infrastructure specifically, the United States and IFIs should offer technical assistance to help Mexico increase the number of bankable projects for investment.
Mexico’s considerable free trade architecture—the country has agreements with more countries than the United States—is also a significant advantage. The DFC should leverage Mexico’s trade agreements with the EU and its membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership to back European, Japanese, South Korean, and Taiwanese investment in Mexico.
Officials in Mexico City and Washington face critical choices after the U.S. presidential election. While Washington remains an important counterweight in Mexico against threats to its democratic institutions and liberalized economy under Morena’s leadership, there has to be a positive agenda if both countries are to realize the full potential of North America to outcompete the world.
Washington needs a viable Mexico policy that balances a stricter line to protect critical U.S. interests and catalyzes greater cooperation. That cooperation can put Mexico on a path to a stronger partnership with the United States—if its leaders face the China challenge. The alternative is the possibility of more tension and less prosperity for citizens of both countries.
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Connor Pfeiffer is the director of congressional relations at FDD Action and a senior advisor at the Forum for American Leadership.
Ryan C. Berg is the director of the Americas program at the Center for Strategic and International Studies, where he also heads the Future of Venezuela Initiative. Twitter: @RyanBergPhD