Opportunities and Challenges: Towards a Renewed Alignment between Mexico and the United States

 

Trends, Opportunities, and Challenges

Mexico’s strategic positioning between Washington and Beijing is quickly changing in light of the U.S.’ hardened position towards renewing the U.S.-Mexico-Canada Agreement (USMCA). After a short-lived attempt at decoupling its alignment with the U.S. by looking to China as an important trade partner, the Mexican government is now trying to secure a more or less stable trade deal with the U.S. that will require full alignment. This means that Mexico will need to police and restrict the flow of Chinese components and goods into the supply chains that make their way onto U.S. soil.

This creates an opportunity for U.S. companies that have long seen Mexico as an important hub for manufacturing of their goods. Because USMCA is now subject to a mandatory annual review process, negotiations supporting U.S. trade and investment into Mexico can help U.S. firms occupy the space that likely will be vacated by Chinese firms.

At present, however, stability of Mexico-U.S. trade and investment framework is threatened by myriad factors. These include President Trump’s irregular use of tariffs to drive foreign policy, the uncertainties brought about by Mexico’s judicial reform, and far-left leaning groups in Mexican politics that still aspire for Mexico to be unaligned to the U.S. This is all made more difficult by the tense bilateral agenda in the fight against drug cartels, in the context of which the U.S. has called out politicians who belong to such radical left leaning groups.

The Road Leading to Where We Stand

Since NAFTA was signed in 1992, the Mexican economy has greatly benefitted by its commercial partnership with the United States. Prior to NAFTA, Mexico had run on an Import Substitution Industrialization model with deep distortions caused by government intervention in domestic markets. This resulted in recurring and deep financial crises during the 1970s and 1980s.

With NAFTA, the Mexican industrialization model transformed into a cross-border integrated manufacturing model that resulted in significant foreign investment flowing into Mexico. The Mexico-U.S. trade partnership has since boosted growth of the Mexican economy, supported job creation, and fended off major financial crises, such as those that marked the pre- NAFTA era.

While Mexico has long tried to offset the gravitational pull of the U.S. economy by entering into free trade agreements with other regions (e.g., European Union, CTPP, Japan) the reality is that the Mexican economy has become intimately linked with the U.S. When visiting border towns, such as Mexicali and Nogales, one cannot but marvel at the dynamics of production, non-stop border crossing of shipments, and the flow of human resources coming and going between both countries.

A Bump in the Road

The replacement of NAFTA by USMCA in 2018 was a wake-up call for Mexico, as it highlighted that Mexico’s preferred commercial partner status was not guaranteed. 2018 was a momentous year as it simultaneously saw the first election of President Donald Trump in the U.S. and the election of Andres Manuel Lopez Obrador (AMLO) as President of Mexico. While the issue of Chinese imports into Mexico and their incorporation into the Mexican manufacturing process was raised by the U.S. as a relevant issue during the USMCA negotiations, the U.S. had not yet adopted a clear geopolitical stance against China.

The year 2018 also marked a radical change in Mexican politics with AMLOs left-wing populist government -supported by his 4T/Morena ideological base, which set on a reform program that sought to reverse 30 years of “neoliberalist” policies. Of particular concern were reforms reversing years of policies aimed at modernizing private investment in the energy sector as well as those reforming the judiciary by having judges elected by popular vote.

An Attempt to Align with China

China had been cautious in approaching Mexico in terms of investment prior to 2018. Chinese investment in Mexico considerably lagged as compared with other Latin American countries, such as Peru and Brazil. While some important Chinese investment had taken hold in the port sector over the last couple of decades, a major passenger train project awarded to Chinese investment in 2014 was cancelled shortly after alleged pressure from the U.S. Chinese investment for supplying the manufacturing sector, too, had been slow to enter before 2018.

Several factors, however, incentivized Mexico’s attempt to adopt a non-aligned policy during the 2018-2024 presidential term of Lopez Obrador, thus propelling a quick and unprecedented inflow of Chinese investment into the manufacturing sector. First, the authoritarian left-leaning views of the Mexican government were naturally drawn towards an alignment with China. Second, the issue of Chinese alignment was placed behind the issue of uncontrolled immigration from Mexico into the U.S., which took precedence in the bilateral agenda. Third, the 2020 Covid pandemic created an enormous distraction globally. So, by the end of President Trump’s first term, Mexico had set a course towards alignment with China and to some degree with Russia and its area of influence (i.e. Cuba, Venezuela, Nicaragua).

As a result of the non-alignment policy during the Lopez Obrador administration, there came an influx of Chinese manufacturing investment focused on participating in the supply chain of goods destined to the U.S. The automotive sector was a particular target. An example of this drive was the reconversion and expansion of JAC’s auto manufacturing plant in the State of Hidalgo in 2024.

A more obscure aspect of the non-alignment policy was the unchecked import of chemical precursors from China and the denial by AMLO himself of fentanyl being produced in Mexico for trafficking to the U.S. Not surprisingly, one of the findings by FINCEN that led to shutting out of three Mexican banks from the U.S. payment system in June 2025 referred to substandard money laundering controls and unchecked financial transactions with Chinese firms.

Chinese Alignment at a Hard Stop?

President Trump’s second term, which roughly coincided with that of Mexico’s new President Claudia Scheinbaum, laid out an obvious conflict with Mexico’s alignment with China. At this juncture, the clear geopolitical stance of the U.S. started pushing towards a North American integration that left no room to China. Also, in this context, the Donroe Doctrine for the Americas has quickly toppled left-wing governments — both by force and democratically — throughout the Continent.

Specifically, with respect to Mexico, the U.S. is cracking down on the gaps that have allowed Mexico to become a manufacturing hub that is surreptitiously used by the Chinese to funnel their goods into the U.S. Also, tighter controls of Chinese imports into Mexico are geared towards impeding the entry of chemical precursors that also make their way as drugs for American consumers.

Implications for U.S. Multinational Companies

U.S. multinationals should be naturally drawn towards filling the gaps that will be vacated by Chinese imports and Chinese investment into Mexico. This will entail using the annual review processes of USMCA to ensure that a level playing field is set for U.S. investment.

Also, to seize this opportunity, U.S. multinationals will need to better understand situations and risks that have been brought about by the Mexican Government’s failed policies and reforms of the past years and how to best navigate them as they tend to improve with actions adopted by Ms. Sheinbaum’s administration — for example, a better understanding of the changes brought about with the reform of the judiciary as well as better risk management of drug cartel and organized crime activity affecting business.