Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / How China EV Makers Are Building Factories in Mexico
Transcript
- Lucas: So if you're tracking the sell-off in China stocks this week — FXI down nearly 3 percent in five days, KWEB off 4.5 — the usual suspects get blamed: Fed hawkishness, a stronger dollar, lingering concerns about Chinese consumer demand. Luna: Right, the narrative we've heard for months. But I think there's a structural shift happening underneath that headline — something that's not about this week's macro at all. Lucas: Exactly. And it's playing out in Mexico, of all places. Chinese electric vehicle makers are quietly building a factory corridor across northern Mexico. BYD has broken ground on a plant in Nuevo León — that's the state bordering Texas. SAIC is reportedly scouting sites in Aguascalientes. Luna: And this isn't just about selling more cars to Mexicans. It's about getting into the US market without paying the 27.5 percent tariff on Chinese-built EVs. Lucas: Precisely. Under the us mexico canada Agreement, vehicles with at least 75 percent North American content can cross duty-free. So if BYD can source batteries and components from within the region, they effectively bypass the tariff wall. Luna: But isn't there a rule of origin requirement for the battery itself? I thought USMCA had stricter rules for EV components. Lucas: You're right — as of 2025, the automotive rules tightened. But Chinese firms are getting creative. CATL, the battery giant, is building a plant in Chihuahua. They're not alone. So you're seeing a vertical integration play: battery factory in one Mexican state, assembly plant in another, all feeding into a finished vehicle that qualifies as North American. Luna: And the timing matters. The yuan has weakened to 6.76 per dollar as of last week — that makes Chinese exports more competitive, but it also makes investing abroad cheaper for Chinese firms. They're essentially using a cheaper currency to buy dollar-denominated assets — factories, land, equipment. Lucas: That's a really sharp connection. The trade surplus data we saw — exports at 3.5 trillion, imports at 4.4 trillion — actually shows a deficit, which partly reflects capital equipment imports for these overseas factories. China is importing machinery to set up production lines in Mexico. Luna: So the headline trade deficit might be masking a strategic buildup. Not necessarily a bad thing if it means long-term market access. Lucas: Exactly. And look, the US isn't blind to this. There's already pressure from Michigan and Ohio senators to close what they call the 'Mexico loophole.' But it's not easy — punishing Mexico for hosting Chinese factories could disrupt the entire USMCA trade framework. Luna: Which is why the WTO and trade disputes are likely to escalate. But in the meantime, Chinese EV companies are moving fast. They're not waiting for policy to catch up. Lucas: And the market is pricing in that uncertainty. That's part of why FXI and KWEB are under pressure — not just macro, but a recognition that the easy export model is over. Companies have to invest billions upfront to access the US market indirectly. Luna: Quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these episodes. No ads, no sponsors, just people who find the analysis useful. Lucas: Yeah, it's a small group that keeps this going. If walking through the economy with us has made something click, that's the place. Back to the Mexico play — I think the real question is whether Chinese firms can actually hit the 75 percent content threshold. Luna: Right. And what happens if they can't? If they only get to 60 percent, they still face a reduced tariff, but it's not zero. The economics change. Lucas: That's the bet. BYD is reportedly aiming for 80 percent North American content within three years. They're partnering with local suppliers, but building a battery supply chain from scratch is expensive. We're talking multi-billion dollar capex commitments. Luna: And those commitments show up in China's current account. The deficit we saw — 190 billion — partly reflects outward direct investment. It's not all trade. Lucas: Exactly. So the yuan weakening isn't just about Fed policy or trade flows. It's also about capital leaving China to build factories abroad. That's a structural shift, not a cyclical one. Luna: And it's not just EVs. We're seeing solar panel makers do the same thing. Longi Green Energy is setting up a module assembly plant in Baja California. They want in on the US solar market, which has tariffs on Chinese-made panels. Lucas: So there's a pattern: Chinese manufacturers are converting their massive trade surplus into foreign direct investment — building factories in Mexico, Southeast Asia, even parts of Africa. It's a way to circumvent tariffs while also diversifying supply chains. Luna: But it also means China's domestic industrial base loses some of those jobs and tax revenues. There's a tension there. Lucas: Absolutely. The Chinese government has to balance promoting outward investment with maintaining domestic employment. That's why Beijing has been slow to fully encourage this trend — but the market forces are stronger than policy signals right now. Luna: And the US response is key. We saw Kevin Warsh's first Fed meeting this week — hints of a possible rate hike. A stronger dollar makes Mexican assets cheaper for Chinese buyers, but it also makes their exports less competitive in third markets. Lucas: Right, and the trade-weighted dollar index is still at 119.5 — very strong. That's a double-edged sword for China: it helps them buy factories cheaply but hurts their export competitiveness elsewhere. Luna: So the Mexico EV factory story is really a microcosm of the entire us china economic relationship right now. Tariffs, currency, supply chains, and geopolitical maneuvering all in one. Lucas: Exactly. And it's playing out in real time. The next few months will tell us whether this bypass strategy works or whether Washington finds a way to block it. Either way, the landscape for Chinese manufacturing is changing permanently.