Mexico changes its laws and removes Chinese parts to stay in the North American Free Trade Pact
6 mins read

Mexico changes its laws and removes Chinese parts to stay in the North American Free Trade Pact

Mexico has come under fire lately for serving as a conduit for Chinese parts and products to North America, and officials here fear a re-elected Donald Trump or politically embattled Canadian Prime Minister Justin Trudeau could try to leave their country out of the U.S.-Mexico-Canada free trade agreement.

Mexico’s ruling Morena party is so afraid of losing the trade deal that President Claudia Sheinbaum said Friday the government has gone on a campaign to get companies to replace Chinese parts with locally made ones.

“We have a plan with the goal of replacing these imports that come from China and producing the majority of them in Mexico, either with Mexican companies or primarily North American companies,” Sheinbaum said.

While Sheinbaum argued that Mexico had been working on that work since the 2021 global supply chain crisis — when factories around the world were halted by a shortage of parts and especially computer chips from Asia — it appears to be an uphill battle. Even the US has faced major challenges in relocating chip production despite billions in subsidies and incentives.

Mexico gained tens of thousands of jobs as American and foreign automakers moved their factories to Mexico under the free trade pact to take advantage of much lower wages. But the idea that Chinese parts — or even entire cars — could roll onto that arrangement to further erode the U.S. auto industry has enraged some people north of the border.

So Mexico is flapping with private companies to get them to move parts manufacturing here.

“Next year, God willing, we will start manufacturing microchips in Mexico,” Mexican Economy Secretary Marcelo Ebrard said Thursday. “Obviously they are not the most advanced chips yet, but we will start producing them here.”

Mexico’s nationalist ruling party, normally very resistant to being seen as bowing to US demands, is flapping in other ways as well.

The ruling party is in the process of eliminating half a dozen independent regulatory and oversight bodies established by previous presidents. It includes antitrust, transparency and energy regulatory bodies. Along with reforms that will make all judges stand for election in Mexico, it has raised concerns in the US and Canada.

Countries are required by the agreement to have some independent agencies, in part to protect foreign investors. For example, they could prevent a government from approving a monopoly for a state-owned company that could force competitors out of the market.

So ruling party lawmakers are actually rewriting the proposed laws to exactly mimic the minimum requirements accepted under the trade deal.

“What’s being done is creating a reform so that it’s almost exactly the same as what’s in the U.S., so we can figure it out,” Ebrard said.

It’s all part of a highly legalistic defense of the trade deal, signed in 2018 and ratified in 2019. Mexico hopes the rules in the deal would prevent the U.S. or Canada from simply walking away when the trade pact comes up for review in 2026. Experts agree, saying that it is unlikely to completely abandon the agreement.

Gabriela Siller, head of economic analysis of the financial group Banco Base notes that if a country is dissatisfied with the trade agreement during the periodic reviews, such as 2026, there is a clause in the pact that says they can ask for a review every year to work out a solution and continue to do so for a decade while the agreement is in effect.

“That is, they wouldn’t be able to come out until 2036,” Siller said. “I think they will play hardball with Mexico in the 2026 review.”

Like all marriages, when the pact no longer works for one party, it can still drag on for years but it is death by a thousand cuts.

CJ Mahoney. who served as deputy U.S. trade representative in Trump’s first administration, said in a talk to the Texas-based Baker Institute in September that the U.S. probably would not exit the trade deal. But with increasingly vocal critics of the pact, renewing it could hold out for years.

“The cost of not renewing immediately is actually quite relatively low,” Mahoney said. “I think the tendency to just kick the can down the road is going to be pretty strong.”

Since many companies will not make large investments in production facilities without security, this could be a serious if not fatal blow to the pact.

How much does Mexico really buy from China? Mexican officials say they have fewer imports of Chinese parts and products than the United States does. But given the huge size difference between the two countries’ economies, that’s a true but weak argument.

In July, the United States imposed tariffs on steel and aluminum shipped from Mexico that was made elsewhere, in an effort to stop China from avoiding import taxes by routing goods through Mexico. It includes a 25% tariff on steel not smelted or cast in Mexico and a 10% tariff on aluminum.

Late. Sherrod Brown, an Ohio Democrat, has called for an end to Mexican steel imports, saying “the alarming increase in Chinese steel and aluminum coming into the country through Mexico … is unsustainable and a threat to American jobs, as well as our economy and national security.”

Ultimately, Mexico may be forced to crack down on Chinese imports, but it won’t be easy.

“Reducing dependence on Chinese imports will not be achieved in the short or medium term,” said José María Ramos, professor of public administration at Colegio de la Frontera Norte in Tijuana.