Mexico and the United States Need to Talk About China Now

Mexican President Andrés Manuel López Obrador is rarely shy about criticizing foreign governments—usually that of the United States or other Latin American nations. Yet in January, López Obrador published a video touting his "very good" relationship with the people and government of China during a meeting with Beijing's ambassador to Mexico. This was no accident. The video came just one day after an explosive report by ProPublica on alleged narco money in López Obrador's various presidential campaigns, a story that the Mexican president said was part of a media campaign against him by the U.S. government. His meeting with the Chinese ambassador was intended to send a message, but it was also part of a broader trend. During López Obrador's sexenio, China's political and economic activity in Mexico has grown significantly. With his successor taking office on Oct. 1, Mexico's approach to relations with China could shift or continue on a path that is likely to increase tensions with Washington.

As the United States is locked in geopolitical competition with China, Mexico is a keystone country for Washington. Last year, Mexico became the United States' largest trade partner for the first time. Millions of U.S. jobs are supported by trade with Mexico. Annual U.S. goods trade with Mexico and Canada, partners to the United States-Mexico-Canada Agreement (USMCA), is nearly $1.6 trillion, supporting supply chains that are the foundation of U.S. economic power. Every minute, $3 million in trade is generated between the North American countries.

China's growing influence and activity in Mexico, however, have not spurred significant action by the Biden administration or Congress. And Mexican officials in recent years, too, have consistently failed to understand how China has scrambled U.S. foreign policy and aligned both parties on the need to compete—possibly generating significant political problems for Mexico. This dual failure risks putting bilateral relations on a collision course given near-simultaneous presidential elections this year and the upcoming sunset review of USMCA in 2026.

The rise of China as a factor in Mexico's economy and relationship with the United States has its roots with López Obrador's predecessor, Enrique Peña Nieto. In 2013, Peña Nieto hosted the then-relatively new Chinese president, Xi Jinping, for a state visit that elevated the bilateral relationship to a "comprehensive strategic partnership." Unlike other Latin American countries, Mexico has declined to join China's Belt and Road Initiative, but China and Mexico have still collaborated on several major infrastructure projects. A Chinese state-owned enterprise (SOE) is part of a consortium that built a section of the controversial Tren Maya, one of López Obrador's flagship infrastructure projects, and two other Chinese SOEs won contracts to upgrade the metro systems in Mexico City and Monterrey.

A relatively recent development is the growing number of Chinese companies setting up operations in Mexico to export to the U.S. market. According to Mexican government statistics, China invested approximately $1.7 billion in Mexico from 2018 to 2023. While that pales in comparison to the $207 billion of U.S. investment stock in the country, looking merely at recent data on foreign direct investment (FDI) fails to capture the breadth of this phenomenon. In 2023, Chinese companies announced $12.6 billion in new investments in Mexico, second only to the United States. Much of this activity has been catalyzed by the existence of bespoke special economic zones geared toward Chinese investors.

While Chinese companies will never surpass U.S. private sector investment in Mexico, the sectors where Chinese companies have announced or are discussing potential investment should concern Washington. For example, several leading Chinese electric vehicle manufacturers are actively considering building factories in Mexico, BYD most prominently among them. If BYD or another Chinese automaker took that step, their vehicles could enter the U.S. market with a 2.5 percent tariff or, if the vehicles meet strict USMCA rules of origin, tariff-free, evading the much higher tariffs imposed on imports directly from China. This would make it easy to undercut U.S. automakers on price given China's extensive state subsidies for the industry, one that Beijing has identified as a strategic priority.

Additionally, the growing presence of Chinese companies with direct ties to China's national security apparatus should concern Washington, especially in the telecommunication and technology sectors. At least 10 Chinese companies identified by the U.S. Defense Department as supporting China's People's Liberation Army and defense industrial base—including China Unicom, Hesai, Hikvision, and Huawei—have a presence in Mexico. While the past two U.S. administrations have waged a concerted campaign against Huawei's global presence because of security concerns related to the firm's ties to the Chinese Communist Party (CCP), even launching a State Department-led "Clean Network" initiative, the company continues to expand in Mexico. Huawei is considered a trusted vendor within billionaire Carlos Slim's telecom networks, and owing to several monopolistic practices within this sector, the company has proliferated throughout Mexico's 4G and 5G networks. Mexico's major cities are dotted with more than 30,000 Huawei Wi-Fi hot spots built in collaboration with the Mexican government. Given that Mexico's digital economy will be a critical area for future U.S. investment, and that cross-border threats and vulnerabilities are a major concern, inroads by companies with ties to the CCP such as Huawei significantly hamstring the bilateral relationship.

Another potential flash point is the Mexico-China nexus of the fentanyl crisis that kills tens of thousands of Americans each year. A recent report by the House Select Committee on the CCP found that the party subsidizes illicit fentanyl materials through tax rebates. Many of these materials are used by Mexican drug cartels to synthesize fentanyl trafficked to the United States. Chinese criminal organizations also provide money laundering networks that help the cartels quickly access proceeds from drug sales north of the border.

Adding to the situation's urgency, Mexico and the United States both hold critical elections this year. In Mexico's race, front-runner and López Obrador protégé Claudia Sheinbaum has said little about China. A leftist politician with a stated concern for sovereignty, Sheinbaum is likely to chafe at the idea that the United States would dictate Mexico's choice of economic partners eligible for USMCA benefits. Further, given the policies of her mentor López Obrador, burgeoning Chinese influence in Mexico seems likely in the event of her probable victory, even as she has vowed to engage with Washington as well.

By contrast, Sheinbaum's main rival, Xóchitl Gálvez, would be more likely to openly embrace North America and Mexico's crucial relationship with the United States. While it is unlikely that Gálvez would give veto power to the United States over Mexico's choice of economic partners eligible for USMCA benefits, her government would likely be open to compromise by limiting Mexico's exposure to risk from China or restricting the level of Chinese investment in certain sensitive sectors. Gálvez has said she will not court China as an alternative to the United States, but there is nonetheless a short-term conflict in incentives between Mexico's desire for greater investment generally and U.S. fears about China's economic and political influence in the Western Hemisphere.

On the U.S. side of the border, both President Joe Biden and former President Donald Trump view China as the principal competitor and "pacing threat" to the United States. In Biden's case, he has treated López Obrador with caution, concerned that the Mexican president could weaponize migration to create domestic political problems for his administration. Biden would likely continue the same policy with López Obrador's successor, limiting a U.S. response to actions that threaten other key U.S. interests in Mexico on trade, democracy and institutions, and security.

Meanwhile, Trump's approach to Mexico would likely mirror his tough approach to the country in his first term. Given López Obrador's penchant for provocation, and Mexico's recalcitrance on issues such as fentanyl cooperation and the ongoing migration crisis at the border, a second Trump administration might seek points of economic leverage to cajole Mexico's assistance. Additionally, Trump's more aggressive approach on China would likely increase tensions on trade and investment.

For the United States, tensions could manifest in a difficult USMCA sunset review process in 2026, which, if not reaffirmed by all three countries, will expire in 2036. The review process will force all three countries to assess the "rules of the game," and China's presence in Mexico will be top of mind. A failure to renew the agreement with the top U.S. trade partner would put hundreds of billions of dollars of bilateral trade and investment at risk. Trump has promised to tariff Chinese vehicles from Mexico at 100 percent if elected. Chinese investment in Mexico has also engendered consternation on Capitol Hill, where some members of Congress have introduced legislation to implement large tariffs on Chinese EVs. There is also the lack of progress on mitigating the flow of fentanyl into the United States produced with Chinese precursors in Mexico, as well as a growing intelligence and intellectual property threat from Chinese companies and technology in Mexico. Frustration with Mexico has even led some members of Congress to float the idea of direct U.S. military action against Mexican cartels.

With a litany of issues to resolve, the 2026 USMCA review process may well stretch into 2027 (and beyond), generating greater uncertainty for the private sector and making the agreement less attractive as a tool for accomplishing broader U.S. geopolitical goals, such as catalyzing supply chain movement away from China.

After the presidential elections in Mexico and the United States later this year, both countries will need to address China's presence in Mexico while maintaining a productive bilateral relationship. Since the signing of NAFTA in 1992, Mexico has tied its future to North America, and the United States must commit to USMCA while ensuring that the free trade area keeps China at arm's-length. This issue should be a top-tier priority for the new administrations now, rather than waiting for a politically difficult USMCA sunset review process.

For the U.S. side, officials must communicate to their Mexican counterparts clear red lines on sectors where heavy Chinese involvement threatens U.S. interests, such as advanced technology and telecommunication and why these are essential for deeper economic integration. Washington should also move forward on joint cooperation on investment screening beyond the December 2023 announcement of a memorandum between the U.S. Treasury Department and Mexico's Secretariat of Finance and Public Credit. These efforts can only succeed if the United States and its partners provide Mexico and other countries in the hemisphere with a viable counteroffer to Chinese investment, leveraging the U.S. International Development Finance Corp. and other agencies to expand FDI and build the infrastructure needed to fuel a nearshoring boom. Finally, Congress and the next administration should avoid the temptation to take unilateral actions on China that violate USMCA and instead negotiate solutions that address both the China issue and Mexico's own unilateral violations of the agreement.

In Mexico, the next administration must understand from the beginning that the country's avowed commitment to its place in North America requires more work on China-related issues, not just rhetoric. The United States is not asking Mexico to cut off all trade and investment with China or seeking to infringe on Mexican sovereignty. However, partners that want to maintain deep economic integration with the United States must adapt to and accept certain red lines that are essential to U.S. national and economic security interests. Further, it is in Mexico's long-term economic interest for nearshoring to be sustainable and create good-quality jobs and investment across the country, not to play the role of assembly point for companies that want to evade U.S. trade barriers.

There is significant momentum on both sides of the U.S.-Mexico border to strengthen bilateral cooperation. Yet failing to address fundamental issues such as investment by the United States' greatest strategic competitor in a proactive way threatens to arrest that momentum. Joint statements and meetings alone will not cut it. Leaders in Mexico City and Washington should seize the inflection point provided by near-simultaneous elections to take meaningful steps to put the relationship on strong footing, preempting a political and economic crisis over China before it's too late.