The Boom in Chinese Investment in Mexico:
Benefits and Red Flags Considerable media and political attention has lately focused on China’s increased manufacturing presence in Mexico. This burgeoning investment is a natural consequence of near-shoring – widely seen as a beneficial development because shorter supply chains to the U.S. are more reliable and resilient and often less costly to producers and ultimately to consumers. Investment in Mexico also helps that nation boost employment and economic growth, providing better lives for its citizens and decreasing immigration pressure. Gross domestic product in Mexico has risen 3.2% in 2023, one of the fastest rates in the world. Earlier this year, Peter S. Goodman of the New York Times wrote that “scores of major Chinese companies are investing aggressively in Mexico…. Chinese firms are establishing factories that allow them to label their goods ‘Made in Mexico,’ then trucking their products into the United States duty-free.” He gave the example of a Chinese furniture maker called Man Wah spending $300 million on a factory in Nuevo Leon and added, “The participation of Chinese companies in this shift attests to the deepening assumption that the breach dividing the United States and China will be an enduring feature of the next phase of globalization.” On Nov. 23, an article in The Economist stated: Chinese investments have been pouring into Mexico lately. Last month alone brought two notable ones. The government of Nuevo León… announced that China’s Lingong Machinery Group, which makes diggers and other construction equipment, would build a factory that it estimates will generate $5bn dollars in investment. The same day Trina Solar, a solar-panel manufacturer, said it would invest up to $1bn in the state. The Coalition for a Prosperous America (CPA), an association of U.S. manufacturers and other producers, reported that foreign direct investment (FDI) by Chinese firms in Mexico increased 276% over the past five years. But creating a platform in Mexico for Chinese companies to ship certain goods to the United States also raises red flags. As the CPA puts it, “Chinese investment in the Mexican economy raises the likelihood of transshipment of goods labeled ‘Made in Mexico’ that are entirely or primarily ‘Made in China.’” In an example of this kind of transshipment, the U.S. Department of Commerce (DoC) last December found that Chinese companies were manufacturing solar panel components in China and “then sending those cells and modules to Cambodia, Malaysia, Thailand, and/or Vietnam for minor processing before being exported to the United States. Such actions amount to an effort to evade the existing antidumping duty (AD) and countervailing duty (CVD) orders on solar cells and modules from the PRC [People’s Republic of China].” These practices, said the DoC, “undermine American industries.” One damaging consequence is that, if Mexico is used for transshipment, a U.S. political response could jeopardize North American free trade, as codified in the USMCA and special tariff exemptions. The Current Tariff Regime and Attempts to Evade It Under the terms of the USMCA, a plant in Mexico -- whoever owns it -- can export products to the U.S. free of tariffs. A similar plant in China is likely to be subject to tariffs under Section 301 of Title III of the Trade Act of 1974. Those tariffs were imposed by the Trump Administration in 2018 after the U.S. Trade Representative (USTR) determined that “China’s acts, policies and practices related to technology transfer, intellectual property and innovation were unreasonable or discriminatory and burdened or restricted U.S. commerce.” The Section 301 tariffs apply to about two-thirds of China’s exports to the United States. The tariff on Chinese auto exports under 301 was set at 25%. Also in 2018, President Trump imposed tariffs of 25% on exports of steel from China and nearly all other nations to the U.S. under Section 232 of the Trade Expansion Act of 1962, which is meant to protect national security. In 2019, Mexico and Canada were exempted from those tariffs. After the Biden Administration came into office, the tariffs were changed to tariff-rate quotas for the European Union and Japan. Under the USMCA, to avoid tariffs, 75% of a vehicle has to be built in North America and 70% of its steel and aluminum have to be sourced from the region. In addition, the Inflation Reduction Act of 2022 (IRA) “allows certain electric vehicles and batteries made in North America to qualify for the full $7,500 federal tax credit, a lifeline for Mexico's auto production, as some U.S. car companies already produced or planned to produce EVs south of the border.” As we previously reported in our newsletter, Mexico has taken steps to deter Chinese circumvention of the content rules. President Andres Lopez Obrador on Aug. 15 imposed 25% tariffs on steel imported from countries such as China with which Mexico does not have a free trade agreement. Those tariffs match the Section 232 duties. The intent is to discourage China and other large manufacturing nations like Turkey and South Korea from transshipping excess steel without tariffs to Mexico, making minor upgrades, and then sending it across the border, tariff-free. The transshipment of steel products from China and other countries through Mexico to the U.S. has been a major concern of the Biden Administration in its campaign against global overproduction, and the new Mexican tariff measure strikes a blow against an activity that harms the U.S. and Mexican steel industries. In response to the Mexican action, a spokesperson for the U.S. Trade Representative stated, “The United States welcomes Mexico’s efforts to address global non-market excess capacity in the steel sector.” Mexico has also cooperated with the U.S. on a test project for a new interoperable system which, among other functions, can identify the foreign origin components of steel products imported from Mexico to the U.S. These are powerful efforts to ensure compliance with rules to prevent transshipments that tries to circumvent rules of origin. ‘Alarming Some Lawmakers Across the Border’ Despite these measures, The Economist warned that “a growing Chinese presence in Mexico could backfire if it raises tensions with the United States. Most Chinese manufacturing and assembly in Mexico seems to be aimed at exports,…especially to America. This is alarming some lawmakers across the border.” In a Nov. 7 letter to USTR Katherine Tai, Rep. Mike Gallagher (R-Wis), the chairman of the Select Committee on the Communist Party, and the ranking member of that panel, Rep. Raja Krishnamoorthi (D-Ill), as well as two committee members from Michigan, Reps. John Moolenaar (R) and Haley Stevens (D), wrote, “We are concerned by how the People’s Republic of China (PRC) is preparing to flood the United States and global markets with automobiles, particularly electric vehicles (EV), propped up by massive subsidies.” The House members called for the 25% tariffs on vehicles exported from the PRC to “not only be maintained but also increased,” but the letter also argued that Section 301 “tariffs on vehicles from the PRC alone will not solve the problem, as the PRC seeks to circumvent tariffs through a variety of means, including transshipment and overseas production in third countries.” The letter continued: “The United States must also be prepared to address the coming wave of PRC vehicles that will be exported from our trading partners, such as Mexico, as PRC automakers look to strategically establish operations outside of the PRC to take advantage of preferential access to the U.S. market through our free trade agreements and circumvent any PRC-specific tariffs.” Then, the letter stated in boldface, with underlining: We look forward to USTR’s response on whether the current rules of origin in our trade agreements need to be strengthened and what other policy tools are needed to prevent the PRC from gaining a backdoor to the U.S. market through our key trading partners. A sensible approach, say lawmakers, is a careful analysis of whether current rules of origin provide adequate protection and, if not, what needs to be done to strengthen them. The letter urges that the U.S. not “once again stumble into a critical dependency on the PRC,” which uses “massive subsidies and other market-distorting measures.” Yellen Lauds U.S.-Mexico Bilateral Economic Relationship and Announces Agreement to Monitor Chinese Investments U.S. Treasury Secretary Janet Yellen met with Mexican private sector executives in Mexico City on Dec. 6 “to hear firsthand about the opportunities they see for greater integration.” Her official remarks began by emphasizing the importance of the U.S.-Mexico bilateral economic relationship: Our two economies don’t just sit side by side; they are deeply intertwined. Bilateral trade with Mexico reached over $850 billion in 2022 and Mexico became America’s largest goods trading partner this year. Exports to Mexico, from electrical machinery to plastics, benefit American workers and firms by supporting more than one million American jobs. American manufacturers and consumers gain from significant imports, including of automobile parts, glass, iron, and steel. And Mexican companies are investing in production in the United States. But, as further evidence of U.S. concern over Chinese capital flowing into Mexico, she also had discussions with Mexican government officials, including Secretary of Finance and Public Credit Rogelio Ramírez de la O, and on Dec. 7 concluded an agreement to monitor foreign investments and share information about screening them. She said in a prepared statement: We will…continue supporting the creation of reliable, secure supply chains that span the United States and Mexico and benefit both our economies through actions to protect our national security in critical industries. I am pleased to announce that the United States and Mexico have today signed a Memorandum of Intent that reaffirms our joint commitment to counter the threat certain foreign investments pose to our national security and establishes a bilateral working group to exchange technical knowledge and best practices. Like our own investment screening regime, CFIUS, increased engagement with Mexico will help maintain an open investment climate while monitoring and addressing security risks, making both our countries safer. The U.S and Mexico “benefit when they work together to guard against foreign investments that pose national security risks,” Yellen said. According to an Associated Press report, “The U.S. wants to prevent Chinese purchases of sensitive American technology that could be accessed through other U.S. trading partners. The U.S.-Mexico agreement may help achieve that goal.” Questions About Who Will Own the Largest Steel Plant in Mexico These concerns will likely be heightened as more information emerges about the possibility of PRC or other Asian investment in the largest steel plant in Mexico by installed capacity. It has been reported that Chinese interests are partners in a group close to purchasing Altos Hornos de México (AHMSA), which at one time employed 14,000 workers in the city of Monclova, in the state of Coahuila, 155 miles from the U.S. border. AHMSA’s principal owner was Alonso Ancira, a colorful figure who was arrested but later freed in a celebrated corruption case. According to the U.S. International Trade Commission (ITC), AHMSA owes suppliers $650 million. Its balance sheet shows $900 million in negative equity. Earlier this year, the ITC reported that AHMSA was acquired by Argentem Creek Partners, an investment firm founded by Daniel Chapman, who formerly ran the hedge fund business at Cargill, the agribusiness giant. Cargill is one of AHMSA’s largest creditors through a $575 million financing deal in 2019. In August, Steel Orbis reported that Ancira had given an interview to a radio station in Texas, in which he said Argentem is in charge of bringing together investors to buy AHMSA in a $1 billion deal. Investors, said Ancira, are “financial company Cargill Capital, Texas investors [a Native American tribe] and Chinese investors.” “The Chinese are experts in this area,” Ancira said. Steel Orbis explained, “From this, it could be deduced that it will be the Chinese who will be the ones who will lead the integrated Mexican steel giant.” (Based on his past performance, Ancira is not necessarily a highly reliable source.) On Nov. 23, as Steel Orbis reported, “managers, technicians and financiers of the Asian company China Steel Corporation (CSC) visited the facilities of the paralyzed steel mill,” AHMSA. CSC is not a PRC company. It is based in Taiwan, which, like China, is subject to the 25% tariffs on steel under Section 232. At this point, it is unclear which investors – if any – will take over AHSMA. What is certain is that U.S. elected officials will be following the saga closely. Common Cause for the U.S. and Mexico in a Fair and Functioning Regional Trade System The U.S. and Mexico have a common cause in ensuring that Chinese and other international firms – especially those provided by their governments with subsidies and other benefits -- do not exploit Mexico’s favored North American tariff position to circumvent trade laws. Concerns extend beyond the written regulations alone to matters of strict compliance with rules of origin. U.S. politicians have shown they worry that China and others will flood the U.S. with manufactured goods – especially autos and steel – in violation of the spirit of the regional trading relationship. They also realize that current rules may not be enough. A careful analysis of how they are working is required, and adjustments made as needed. It is apparent as well that Mexico has to be sensitive to those U.S. concerns in its own policy making and enforcement, with both nations working in complementary fashion.
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