Mexico Is Facing a Second — and Worse — ‘China Shock’
Mexico’s economic future is suspended between two superpowers. Its trade-heavy economy sends nearly 80 cents of every dollar in exports to the US, leaving it vulnerable to President Donald Trump’s threats. Meanwhile, rising imports from China threaten its bid to grow its economy through advanced manufacturing.
The US and Mexico are each other’s largest trading partners, exchanging more than $800 billion worth of goods and services back and forth each year. Intermediary goods lead these exchanges, with circuit boards, engines and other parts coming together in the form of vehicles, electronics and planes. Atop these North American manufacturing supply chains are cross-border sales of fuel, grains, produce, machinery and medical devices.
While Mexico’s overall trading ties with China pale in comparison, they have been growing at double-digit rates. And, most worrisome for Mexico, the surge is mostly one way. Chinese imports nearly doubled over the last decade to some $130 billion, while Mexican exports back total less than $10 billion, leaving a $120 billion bilateral trade deficit outstripping that between the US and China in relative size and share.
The Trump administration accuses Chinese importers of using Mexico and the United States-Mexico-Canada Agreement (USMCA) as a tariff-free “backdoor” to US consumers, with limited evidence. Yet Mexico should worry regardless: The import surge could decimate its domestic industries and the jobs they create. The solution is not just to raise tariffs to appease Trump. Mexico should push again for fuller North American integration. Its best path forward is not diversifying away from, but tying itself closer to, the United States.
The Mexican economy has been hit before by China’s global exports. In 2000 Mexico exported more computers, telecommunication equipment, clothes and auto parts to the US than any other country. Just over a decade later, it had lost its lead to China in all but auto parts. Overall, Mexico’s manufacturing sector shed 1 million jobs. Economic growth halved to less than 2% from its 1990s NAFTA honeymoon trend.
Much is made in the US of the negative effects of Chinese manufacturing for US-based workers in the 21st century’s first decade. Often dubbed the “China Shock,” it cost the US between one to two million jobs from 1999 to 2011, as factories decamped across the Pacific. But the exodus was similar for Mexico, and much more severe in per capita terms, as it was more of a competitor than a complement to China’s manufacturing rise.
Over the last 15 years Mexican manufacturing clawed its way back by shifting into new industries and more technically advanced products. Mexico doubled down on vehicles, production rising from 1.5 million to nearly 4 million a year. Aerospace took off in the states of Querétaro, Nuevo León and Chihuahua, which came to host dozens of suppliers to Starlink, SpaceX, Boeing, Airbus, Bombardier, Safran and Honeywell. Tijuana, once a headquarters for televisions, became home to makers of medical devices and electronics. Foxconn, Micron and other global electronics firms set up shop in Guadalajara and along the US-Mexico border, churning out servers, computers and linking into semiconductor supply chains.
Mexico has benefited from the heightened geopolitical strife between the US and China. Exports to the US have risen more than 40% in the last five years, due in large part to nearshoring gains in electronics, medical devices, cars and car parts.
Yet this promising economic path is again imperiled. China has set its sights on dominating new manufacturing sectors. Formal government plans lay out blueprints to scale production in pharmaceuticals, medical devices, electric vehicles, robotics, planes, semiconductors, electronics and other advanced industries where Mexico has staked a claim. And the Chinese government has followed up with hundreds of billions in cheap capital, tax breaks, ready-made industrial parks and other benefits to gain ground.
As a result, China now makes much more than it could possibly consume across many of these sectors. It builds two times the number of cars its drivers buy. It makes enough batteries to meet total global demand. And it is building more semiconductor fabs than any other nation, on track to dominate global supplies, particularly of so-called legacy chips vital to manufactured goods.
This overcapacity is a feature, not a bug, of China’s economic and political system. To keep people employed as the economy stumbles through a deep and lingering real estate downturn, weakening consumption and falling domestic prices, the government is turbocharging export-led growth. Last year its trade surplus with the world reached nearly $1 trillion, an increasing part going to emerging markets.
Mexico is already seeing some of this wave. Last year one out of every five cars bought in Mexico were made in China, despite Mexico’s own prowess as the world’s fifth largest automaker. Imports of Chinese-made aluminum and steel climbed, as did that of medical devices.
Mexico has begun to raise tariffs to slow the flood of products. They aren’t alone. The US, European Union, Brazil and Canada are among the countries taxing Chinese-made electric vehicles. Many nations have added duties or quotas to steel and steel product imports. And the EU has tightened public procurement rules to curtail sales of Chinese-made medical devices.
But such measures won’t be enough to protect Mexico’s economy or to fend off US ire over Chinese imports. With a formal review of the USMCA trade agreement scheduled to begin in the fall, Mexico should lean into the current geopolitical worries to push for broader and deeper economic connections with its neighbors, to create a Fortress North America. This means matching tariffs and antidumping quotas, countervailing duties, and temporary safeguards against unfair trade. It means jointly screening foreign direct investments. It involves coordinating and even sharing stockpiles of critical minerals, medicines, and other strategic products, and tightening rules of origin across vital industries to ensure most inputs come from within the trading block to solidify supply chains. And it means connecting North America’s three countries even more deeply through physical, digital and energy infrastructure.
While US trade and tariff announcements seem not to distinguish between friend and foe, Mexico can find allies across the US government for such a game plan. China is perceived as a much greater commercial, military, and national security threat to US policymakers, who mostly recognize the need for allies as this great power competition heats up. Many already realize the importance of Mexico and North America more broadly for US economic competitiveness. And with Mexico one of the most important international destinations for US-made products, hundreds of members of Congress see the day-to-day benefits that trading ties hold for local jobs.
In the early 1990s, Mexico’s then-President Carlos Salinas kicked off North America’s formal integration with a proposal that became NAFTA, the predecessor to the USMCA. Some three decades later, Mexico again has an opportunity to lead the way.
