Facing growing concerns about the future of its economic ties with the United States and Canada, Mexico has found itself at the crossroads of international trade negotiations. The nation’s leaders are anxious over accusations of enabling Chinese manufacturing to leverage its position under the U.S.-Mexico-Canada Agreement (USMCA). With the looming 2026 review of the agreement, particularly under the specter of Donald Trump’s potential re-election and the uncertain political climate in Canada, Mexico is shaking things up by taking action to replace Chinese-made parts with local alternatives.
Recently, President Claudia Sheinbaum of Mexico announced the government’s initiative to encourage companies to substitute imports from China with products made within Mexico. “We have a plan with the aim of substituting these imports… and producing the majority of them in Mexico, either with Mexican companies or primarily North American companies,” Sheinbaum stated, emphasizing the importance of maintaining economic ties and job creation within the country.
While this initiative is significant, Sheinbaum suggested efforts to substitute these imports have been underway since the global supply chain crisis of 2021, which had caused disruptions worldwide, particularly with the availability of semiconductor chips. Replacing Chinese parts presents challenges, as the U.S. itself has struggled to bring chip manufacturing back home, even with substantial financial incentives.
Over the years, Mexico has been attractive to foreign automakers, who relocated factories there to utilize the country’s lower labor costs under the free trade agreement, leading to job creation. But now, the fear is not just about losing jobs to Chinese imports but also about the potential backlash from the U.S. if it appears Mexico is serving as too much of a conduit for Chinese goods, putting the entire automotive sector at risk.
To counter these fears and reinforce its manufacturing capabilities, Mexico is now working with private enterprises to bring production of fundamental components, like microchips, to its own shores. Mexican Economy Secretary Marcelo Ebrard expressed optimism about these developments, stating, “Next year, God willing, we are going to start making microchips in Mexico.” While he noted these won't be the most advanced chips at the outset, they represent the country's push toward self-sufficiency.
Despite the push for local production, Mexico’s government seems to face another challenge: the elimination of independent regulatory and oversight agencies. The ruling Morena party has proposed dismantling these bodies, including those focused on anti-monopoly issues and energy regulation, which were set up by earlier administrations. This move has sparked concern among U.S. and Canadian counterparts, particularly as these agencies provide safeguards for foreign investors.
Another factor complicates this situation: under the USMCA, countries are required to maintain independent oversight partially to protect foreign investment. The legislators from the ruling party are working to modify laws to mirror the minimum requirements laid out by the trade agreement to appease concerns from neighbors to the north.
Given the historical tensions, various experts remain cautious about the stability of the trade pact. Gabriela Siller, director of economic analysis at Banco Base, noted the provisions for annual reviews provide some reassurance. “If countries are dissatisfied, they can ask for review each year to work out solutions over the next decade, hence not immediately exiting the agreement until 2036,” Siller explained.
C.J. Mahoney, who once served as deputy U.S. trade representative, shared insights on potential future negotiations during discussions at the Baker Institute. He indicated the U.S. would likely refrain from terminating the agreement entirely; rather, they could attempt to postpone renewals as mounting criticism from various factions grows.
This dynamic creates uncertainty among businesses, which depend on trade agreements for consistent frameworks to make investments. “The costs of not renewing immediately are pretty low,” Mahoney stated, hinting at the likelihood of renewal negotiations being delayed for various political reasons. The longer companies face uncertainty, the less inclined they'll be to commit to substantial investments necessary for production facilities, potentially jeopardizing the agreement.
Mexican officials assert they import less from China than the United States, yet this point falls flat when evaluated against the inherently larger economic scale of the U.S. The dynamics at play are complicated, and with the U.S. imposing tariffs on steel and aluminum, any misstep could drastically alter Mexico’s economic relations across North America.
