Introduction

In recent years, the United States of America has undertaken the re-structuring of global supply chains. This effort comes in view of China’s growing dominance over the supply chains, rising geopolitical pressures and mounting labor costs. This re-structuring is being driven by a transition from the 20th century off-shoring model to a 21st century near-shoring concept. This near-shoring is aimed at relocating supply chains to the regions with closest proximity to the world’s consumer markets, particularly from China to Vietnam, and Mexico (Council of Procurement and Supply Chain Professionals, n.d.). Mexico is the primary beneficiary of this near-shoring due to its closest proximity and free trade agreements such as the United States-Mexico-Canada free trade agreement (USMCA).

While this strategy initially aimed at reducing the supply chain vulnerabilities and geopolitical pressure amidst intensifying US-China rivalry, its outcomes reveal a far more complex reality. Rather than being excluded, Chinese companies have successfully integrated themselves within the North American supply chains, particularly through Mexico. The US-China trade tensions, alongside the wage pressures and associated regulatory costs in China have incentivized manufacturing companies to relocate production. Mexico has consequently become a primary destination - not only for US companies but also for Chinese firms, seeking continued access to American consumer markets.

China is, thus, circumventing US tariffs via Mexico along the US southern border. It has adopted three different pathways: transhipment, supply chain integration and foreign direct investment (Meltzer, 2025). This issue brief approaches the issue of restructuring of supply chains from the perspective of North American regionalism and US strategic competition with China. It  examines how US-led  restructuring of global supply chains, and near-shoring to Mexico, intended to reduce dependence on Chinese manufacturing, is instead serving as a back door entry for Chinese firms into the North American supply chains. In doing so, it actually raises a serious question: is near-shoring reducing China’s dominance in the supply chains, or is simply reshaping the channels that reinforce dependence on China?

China’s Supply Chain Shell Game

Chinese manufacturers are relocating their manufacturing industries to Mexico. Chinese firms are using Mexico as a transit hub for assembling and manufacturing of their products for selling in the American  markets. Once in Mexico, these firms can label their products as “Made in Mexico”, and since they are made in Mexico, they can be moved across the borders duty free under USMCA (Katz, 2024). This indicates a new era of globalization, where economic integration persists, but under the guise of “regional localization”. 

Mexico’s recent trade patterns reinforce this shift from globalization to localization. In 2023, Mexico became a leading trading partner of the US while simultaneously Chinese exports to the country boomed. In 2002, Mexican exports to the US contained less than 5% of Chinese components, today it has risen to more than 21% (Jones, n.d.). This trend has manifested itself in high-growth sectors such as electric vehicles. China is leading the electric vehicle production industry, which are relatively cheaper and highly valuable as compared to the American ones.  The Joe Biden administration imposed a tariff of 100% on the Chinese EVs import and offered subsidies for US battery companies, without which the American EVs would disappear from the American markets (Elliot, 2024). Chinese EV manufacturers have adapted to this American protectionism by shifting production networks rather than exiting the markets. Chinese carmakers are taking Mexico by storm and, in the coming years, it would become difficult to explain to the American consumers why they are not allowed to buy inexpensive cars, which are readily available across the border in Mexico.

While the US believes China is planting high-capacity industrial plants South of the border that will lead the production, the reality is somewhat different. China has integrated itself further down the supply chain. By 2023, at least 20 Chinese auto-parts manufacturing companies were operating in Mexico, producing trims and battery casings as well as high tech elements such as software to assist drivers (Rapoza, 2024). Thus, the pattern is obvious. Chinese companies, aware of the fact that the US-China trade war is going to be a permanent feature of the coming era of globalization, are not rushing to Mexico, with no plans. Instead, they are embedding themselves at almost every level of North American Supply chains; a comprehensive strategy that will enable sustained access to the US  markets while reducing direct exposure to the US tariffs. 

Mexico’s Strategic Position: Opportunities and Constraints 

Mexico’s growing involvement in North American Supply chains is no longer just based on the near-shoring gains and USMCA but increasing integration of Chinese capital and FDI. Mexico’s economy, today, is based less on duty free Mexican firms, and more on tariff evading Chinese companies. By 2024, China' s exports to Mexico made up 21% of Mexico’s imports, creating a surplus of almost $120 billion (Kelly, 2025). By June of 2023, Mexico’s total exports had climbed from 5.8% from a year earlier to $52.9bn (Grant, 2024). A significant portion of this economic boom is because of investments from Chinese firms, setting up industries in Mexico, to gain closer proximity to their North American consumers and limit their vulnerability to shipping problems and geopolitical tensions. These dynamics underscore the need for a binding investment screening mechanisms, as China’s investment is deeply embedding itself into the North American supply chains.

The first wave of Chinese outbound direct investments in Mexico came in 2016-2017 under China’s Belt and Road initiative. After these initial investments in infrastructure, Chinese companies are now bringing a surplus amount of Greenfield Foreign Direct Investment - a type of foreign investment where a parent company launches a business operation abroad from the ground up. These Greenfield FDIs are transforming Mexico into a regional manufacturing powerhouse, particularly in sectors such as electronic and automotive productions  (Senyi, 2024). China’s FDI in Mexico has significantly increased after the 2018-2019 US-China trade war and the USMCA taking effect in mid-2020 (Estefan, 2026).

However, the growing presence of Chinese firms is creating significant structural challenges for Mexico. Issues loom over the USMCA, where the US is adopting an increasingly restrictive stance towards China's presence in Mexico and Canada is suggesting a bilateral free trade agreement, booting Mexico out. Mexico also fears being lost to Chinese capital and exports. Increased reliance on foreign capital raises concerns about limited domestic value addition and industrial autonomy. While China’s investment in Mexico can boost industrial expansion, the relationship between the two is highly asymmetrical, characterized by record trade deficits as Mexico’s imports from China exceed its exports. Also, Mexico’s cash strapped government cannot provide the subsidies for domestic manufacturing of chips and batteries that are available for domestic production in the US and China. Adding to this is the fact that some products cannot be simply sourced out of China, reinforcing dependency and exposing the lack of transparent traceability in the global production supply chains..

In this complex scenario, Mexico’s position is being shaped largely by structural constraints. On one hand, its deep integration into US markets via trade agreements like USMCA, is limiting its policy autonomy, while on the other hand, increasing reliance on Chinese exports is reinforcing economic dependence.  Thus, nearshoring to Mexico seems to have only reduced transportation times and costs, rather than reducing dependence on America’s top competitor. These patterns suggest that attempts to diversify away from China has resulted in America’s reintegration into China-centered supply chains. 

Implications for North American Political Economy

The United States' economic decoupling strategy and attempts to reduce dependence on China seems to backfire in its backyard, which is now teeming with Chinese manufacturers. Mexico has emerged as a central player in the restructuring of North American supply chains, as Chinese firms, in order to retain their access to the US consumer markets, are relocating their production. Efforts to reduce dependence are reinforcing it through indirect channels. Years of off-shoring domestic industries for cheap labor and access to raw materials has weakened the US industrial base. Under Trump’s protectionist policies, America is trying to revive its production facilities at home and secure its supply chains. However, the strategies designed for American interest seem to add to their vulnerability, by making them more dependent on China. 

Despite many efforts for localization, it is circling back to the globalization they themselves created. Trump's tariffs and America’s USMCA tend to serve not only American interests but also China’s, which has relocated its production geographically - most notably towards Mexico. For China’s export-oriented economy, the US represents the largest consumer market and Trump’s tariffs to drive China away from its primary consumers have only brought them closer. Ever since the first US-China trade war of 2018 and escalating economic confrontations in 2019, Chinese firms have been investing heavily in establishing manufacturing facilities in Mexico, which provides Chinese goods tariff-free entry into the US markets.

These dynamics indicate that the North American political economy, even though evolving and restructuring, does not fully align with US strategic objectives. Current policies, aimed at decoupling, are representing a complex reality. Instead of reducing dependence, they are providing a backdoor entry to China, which has embedded itself in the regional supply chains, albeit in less visible ways. 

Conclusion

Whether near-shoring reshapes the supply chains, or reinforces a transition from “Made in China” to “Made by China” is based on the effectiveness of the United States’ regional strategy. Under the current circumstances, North American economies should move beyond geographical relocation to assessing the underlying structures of supply chains. The most structurally important step, in this regard, would be the creation of the Committee on Foreign Investment in the United States (CFIUS), which constitutes a foreign investment screening regime by restricting FDI on national security grounds.. By screening FDI that apes US and substituting imported Chinese components with those made in Mexico (microchips and lithium batteries), Mexico can reduce its structural vulnerability and dependence. Additionally, a North American Digital Product Passport system should be put in place, to certify the true origin of goods entering the US markets under USMCA using blockchain or AI-verified supply chain data - “know-the-supplier-of-your-supplier.” Ultimately, without addressing the underlying dynamic of production and ownership, reshoring risks reinforcing, rather than reducing, China’s influence on the North American supply chains.