In recent years, some Chinese companies have turned to Mexico as a lucrative new investment area. With the US government becoming increasingly hostile to China's direct investment in the US, the Mexican government actively seeks to deepen its economic ties with China, and publicly announces its intention to increase China's investment in Mexico and Mexico's business in China. While acknowledging its high dependence on trade with the United States, Mexico is working to diversify its business partners, and some Chinese manufacturers are seizing the opportunity to help Mexico achieve these goals. Recent economic initiatives announced by the Mexican government also indicate that opportunities for foreign investment in Mexico's energy, telecommunications, transportation and tourism will soon increase. In view of the restrictive tariff imposed by the United States on Chinese goods, Mexico can also become a strategic investment place for Chinese enterprises looking for alternative means to enter the U.S. market. In addition to sharing borders with the United States and its growing manufacturing capacity, Mexico enjoys zero tariff treatment when its goods enter the U.S. market through its participation in the North American Free Trade Agreement (NAFTA). Under the upcoming US Mexico Canada agreement, Mexican goods will continue to enjoy the right to enter the United States duty free. The agreement will replace NAFTA. Therefore, if the goods manufactured in Mexico meet certain standards stipulated in NAFTA, Chinese enterprises can bypass US tariffs.
A. Why Mexico has become an attractive target market for investment 1. According to Section 301, tariffs on Chinese imports make it more difficult to import Chinese goods directly to the United States. Section 301 of the trade act of 1974 empowers the U.S. trade representative to levy tariffs in retaliation for unfair trade practices. The trump administration has made extensive use of this power. In the past two years, the trump administration has claimed that China's actions have damaged U.S. intellectual property rights and imposed tariffs on more than $300 billion worth of Chinese goods exported to the United States. Because the ongoing trade negotiations between the United States and China have repeatedly reached a deadlock, there is no indication whether or when the United States will abolish these tariffs. Even if China and the United States sign the first phase of the trade agreement, unless a more comprehensive bilateral agreement is reached, the United States will not significantly reduce the tariffs on Chinese exports to the United States. Specifically, according to the first phase agreement, the United States only promised to cut tariffs on Chinese goods worth about 120 billion US dollars by 15%, that is, to 7.5%. It is worth noting that the heaviest 25% tariff will continue to be levied on Chinese goods worth 250 billion US dollars. With the implementation of these tariffs, the cost of importing Chinese products to the United States will be higher. In addition, the actual effectiveness of the dispute settlement mechanism provided in the first phase of the US China trade agreement remains to be tested. Other important trade conflicts between the two, such as technology policy, industrial subsidies, state-owned enterprise rules, have not yet been resolved. As a result, despite the signing of the first phase trade agreement between the United States and China, Chinese enterprises have so far found that there may be uncertainties and high costs in conducting trade with the United States. The United States may be hostile to imports from China indefinitely. 2. NAFTA allows Mexican made goods to enter the North American market duty-free. By investing in Mexico, Chinese enterprises can make use of the free trade rules of free trade between the United States and Mexico, and at the same time avoid the tariff of article 301 of the United States on Chinese goods. Goods produced by Chinese enterprises in Mexico can be imported into the United States duty-free in accordance with NAFTA. However, Chinese companies can't just see Mexico as a place where Chinese made goods can be transported to the United States. On the contrary, in Mexico, any product that has not undergone a "substantial transformation" cannot be regarded as a Mexican made commodity. The rule of "substantial change" means that the product must undergo fundamental changes in form, appearance, nature or characteristics, so as to increase its value substantially, so as to obtain tax-free status. As far as NAFTA is concerned, products belonging to one of the following four categories can be defined as originating in Mexico, so they can enjoy duty-free treatment when imported into the United States (or Canada): 4 a) goods are obtained or produced in the territory of one or more NAFTA parties, excluding any non originating materials;
b) The good is produced entirely in the territory of one or more parties from originating materials, which may be made from non originating materials; c) as production takes place entirely in the territory of one or more parties, each non originating material used in the production of the good is subject to a change in the tariff classification set out in Annex 401; and d) The tariff classification of goods does not change, but if the transaction value method is adopted, the regional value content of goods shall not be less than 60%; if the net cost method is adopted, the regional value content shall not be less than 50%. 3. The US Mexico Canada agreement may further stabilize Mexico's investment market. Although NAFTA is still the agreement guiding trade among the United States, Mexico and Canada, the three countries are about to ratify the U.S. - Mexico Canada agreement (the "U.S. - Mexico Canada agreement"), which updates intellectual property rights, digital trade, financial services, data storage and labor provisions. Although negotiators are still working out the details of the agreement, the US House of Representatives approved the US Mexico Canada agreement on December 19, 2020, and the US Senate is expected to pass legislation to approve the US Mexico Canada agreement in early 2020. Because the Mexican Senate has also approved the US Mexico Canada agreement, which replaces NAFTA, now only the US Senate and Canada need to approve it. Although Mexico, the United States and Canada have experienced economic uncertainties in their official negotiation of the US Mexico Canada agreement, Mexican officials are optimistic that the ratification of the trade agreement will promote a new chapter in Mexico's investment and growth, which will create a more favorable environment for China's investment in Mexico. In order to stimulate economic growth, Mexico is opening up to private investment. The opportunities available in Mexico are not limited to manufacturing. In the next few years, Chinese investors are likely to enjoy more opportunities to invest in Mexican energy and infrastructure projects. In the months after the election of Andres Manuel Lopez ovlador in 2018, the Mexican government adopted a serious left leaning approach, creating hostility to foreign investment. As president Lopez o'flador cut spending and canceled major public works projects, foreign investors began to feel cold about their investment in Mexico, while potential investors sought markets other than Mexico. As a result, Mexico's economy was hit and fell into recession in 2019.
However, in order to revitalize Mexico's backward economy, the Mexican government recently began to ease its nationalist and populist policies and actively welcome private investment. In November 2019, President Lopez o'flador announced the launch of $44 billion worth of infrastructure projects from 2020 to 2024, seeking the participation of the private sector and investing in major projects to stimulate Mexico's economic growth. 8 in 2020 alone, the program plans to launch 72 projects worth 22 billion US dollars, mainly involving tourism, transportation and telecommunications. 9 it is expected that the second round of projects will mainly focus on the energy sector. Although it remains to be seen how the plan will be implemented and how the Mexican government will seek bids for projects, the Mexican economy is likely to continue to open up to foreign and private investors in the next few years. 5. Many Chinese enterprises have achieved success in Mexico. Even under the current economic conditions in Mexico, Chinese enterprises are booming in Mexico. Taizhou Fuling Plastic Co., Ltd. is a Chinese manufacturer of plastic utensils, producing paper cups and straws for American restaurants. The trump administration's actions under Section 301 include imposing tariffs on paper products such as fulling global. In order to remain competitive in the United States, in the spring of 2019, Fuling announced plans to open a $4 million plant in Monterey, Mexico. The plant was scheduled to start production in July 2019 and ship millions of paper straws to the United States. The company now makes full use of its duty-free exports to the United States, favorable business conditions in Mexico, and lower transportation costs brought about by Mexico's favorable location. 11 as one of the world's largest TV manufacturers, Hisense of China purchased a manufacturing plant from sharp in rosalito, Mexico, in 2015. The company invested in a Mexican manufacturing plant long before the trump administration imposed the 301 tariff, targeting the U.S. consumer market. In the spring of 2016, Hisense announced that it will double its investment in Mexico to update and expand its Mexican plant, that is, Hisense will inject another $30 million to strengthen automation and increase its production capacity to 4 million units. Hisense said that wages in Mexico are roughly equivalent to those in China, but by maintaining facilities in Mexico, it takes about one month to transport products from Mexico than from China. Since the imposition of Section 301 tariff, thanks to Hisense's business decision to invest in Mexico, Hisense products made in Mexico can enter the United States without paying the tariff specified in Section 301. B. How to invest in Mexico? The Chinese government has certain regulations on foreign investment of enterprises. Chinese enterprises' overseas investment plans need to be formally approved by the national development and Reform Commission (NDRC), the Ministry of Commerce of the people's Republic of China (MOFCOM) and the State Administration of foreign exchange of the people's Republic of China (SAFE). Each of these government agencies has its own approval process.
1. The national development and Reform Commission divides overseas investment into "sensitive projects" and "non sensitive projects". This classification standard depends on the industry and country of overseas investment. Sponsors of sensitive projects must submit project application reports detailing investors, investment situation and impact on China's national security. Non sensitive projects do not need substantive review, only need to submit relevant documents for filing. 2. The Ministry of Commerce of China also divides investment into "sensitive" investment projects and "non sensitive" investment projects. If it is a sensitive investment project, an application covering investors and investment information must be submitted, and the application must be subject to substantive review when approval is determined. If it is a non sensitive investment project, just fill in the overseas investment record form and submit it together with the copy of the business license. 3. Foreign exchange registration is required for overseas investment by safe. According to the procedures of the safe, each bank is responsible for reviewing and managing the foreign exchange registration of specific investments; then, the safe supervises the bank's business procedures. Therefore, when applying for foreign exchange security, enterprises may find it helpful to maintain a good relationship with one or more banks and hold sufficient capital in relevant bank accounts.