The practice of nearshoring — bringing manufacturing for U.S. markets back from Asia to the western hemisphere, especially Mexico — has been framed as a big plus for American producers. But what if it’s just another way for China to strengthen its position in global trade? 

Over the past 18 months, Chinese companies have leased up to 80% of industrial parks space in Mexico. China’s total investment in the country last year approached $500 million, up from $300 million in 2020 and $200 million in 2019. Chinese-financed projects in that country include production of solar panels, electric vehicle batteries and housing materials for the U.S. market.

So much for the notion that a shift away from manufacturing in China would weaken that country’s grip on global production.

Chinese suppliers are taking advantage of the requirements for North American content spelled out in the United States-Mexico-Canada Agreement for tariff-free access to local markets. The treaty raised the threshold on motor vehicle local content from 62.5% to 75%, according to Jorge Gonzalez Henrichsen, co-chief executive officer of The Nearshore Company, a manufacturing services provider specializing in Mexico. “If you want to still sell to the U.S., you have to be on this side of the world,” he says. 

Proximity to American markets isn’t the only reason for renewed interest in Mexico. Over the past several decades, many U.S. companies flocked to China in search of cheap factory labor. Now, China is coming to Mexico for the same reason, taking advantage of one of the lowest minimum salaries within the 38-member Organization for Economic Cooperation and Development (OECD).

Much of the recent surge in manufacturing activity in Mexico can be chalked up to U.S. producers enhancing an existing presence, in response to tariffs imposed on Chinese imports by President Trump and retained by President Biden, Henrichsen says. But Chinese companies were similarly motivated by the simmering U.S.-China trade war, as they waited to see whether the Biden Administration would remove or reduce the tariffs. “When it became clear that wasn’t going to happen, they decided that they either had to move to North America, or they were going to lose business from U.S. consumers,” he says. The Mexican state of Nuevo León, especially around the city of Monterrey, has been a particular beneficiary of the shift.

Many of the Mexican factories turning out components and finished goods for U.S. consumers are located close the U.S.-Mexico border. But other suppliers, especially those from Southeast Asia, have sited operations closer to the center of Mexico, within the state of San Luis Potosí, Henrichsen says.

The number of Chinese companies coming to Mexico continues to rise. In October, 2021, Chinese companies were reported to account for 30% of the $7 billion in new foreign investment entering Nuevo León. And while the share from U.S. companies was 47%, “the rate [at which] China is going is impressive,” Henrichsen says.

A significant portion of nearshoring activity is being generated by Chinese-owned multinational manufacturers. They’re assembling industrial hubs consisting of multiple suppliers, with the goal of achieving vertical integration of goods produced in Mexico. At the same time, Henrichsen says, another group of Chinese-owned companies that are less sophisticated in their approach to global trade are importing products from China, stamping them “Made in Mexico,” and hoping for tariff-free treatment by U.S. Customs.

Relatively cheap labor remains one of Mexico’s biggest draws for manufacturers from all countries. (In constant dollars, Mexico’s hourly factory wages are currently lower than those of China — a dramatic reversal from years past.) But don’t expect that state of affairs to last forever, Henrichsen says. “Everybody’s assuming that the labor pool in Mexico is infinite. It’s better than in the U.S., but there is a limit.”

Access to qualified labor is becoming an issue in key area of Mexico such as Monterrey and Tijuana. And it could grow even worse as producers seek to locate more sophisticated assembly operations nearer to the center of the country, where much of the population is accustomed to agricultural work. Henrichsen says China is sending engineers to Mexico to train local workers in manufacturing.

There’s a way in which U.S. suppliers might benefit from the wave of Chinese investment in Mexico, if producers from China can’t meet the USMCA requirements for local content. In such cases, original equipment manufacturers could end up turning to American suppliers of certain high engineered parts, Henrichsen says.

U.S. manufacturers might further counter China’s strategic moves by following its example of creating vertically integrated production models in Mexico. Still, such an idea is “very difficult to digest,” says Henrichsen. Many American companies have lost the knowhow to create such ecosystems, and could find themselves falling back on Chinese companies to make up for the shortfall. They’re more likely to continue pursuing the outsourcing model that took them to China, then Mexico, then anywhere else where labor is cheap. Meanwhile, China will continue to solidify its position as the world’s factory — wherever it might be located.