Impact of the October 2025 US-China Detente On United States-Mexico Trade
On October 29, 2025, President Trump and Chinese Communist Party Chairman Li concluded a limited detente in their ongoing trade war. (U.S-China Trade Agreement) This trade deal, largely a return to the status quo in February-April 2025 is scheduled to continue for a year. The compromise was essential to persuade China to lift its draconian export restrictions on rare earth minerals and magnets made from them. (Rare Earth Minerals) It has been welcomed by stakeholders because trade deal may eliminate at least some of the uncertainties affecting United States-China economic relations, with positive spill-over effects for global commerce more broadly.
A significant question is how the trade deal will affect Chinese trade with and investment in Mexico, along with exports by Chinese-controlled enterprises there to the United States. The full answers will not likely be clear for at least several months, but some indications are already discernible and deserve commentary. This is appropriate even though current U.S. tariffs are always subject to change at any time with little or no notice. They may also be affected by a pending U.S. Supreme Court case challenging the use of the International Emergency Powers Act (IEEPA) as the legal basis for many of the tariffs. (IEEPA Challenge)
The remainder of this note is divided into five parts. Part I summarizes the major aspects of the trade deal. Part II speculates on the impact on future U.S., Chinese and third country investment in Mexico. Part III discusses the indirect implications, such as the impact on the 2026 USMCA negotiations and issues relating to transshipment. Part IV focuses on nearshoring and reshoring. Part V provides brief conclusions.
I. Key Elements of the Trade Deal
Major elements of the trade deal are summarized as follows:
1. Reduction of the fentanyl tariffs on China by the United States from 20% to 10%, while maintaining the 10% "baseline" tariffs and continuing the suspension of the 24% "reciprocal" tariffs. Taken together, and in combination with the 25% tariffs imposed during Trump's first term on most Chinese products, these actions effectively reduce the general aggregate tariff on U.S. imports of Chinese goods to about 45%.
2. Commitments by China to take further steps to reduce shipments of fentanyl and fentanyl precursors to North America;
3. Mutual elimination of recent port fees on Chinese ships calling at U.S. ports and vice versa;
4. Agreement by China to purchase 12 million tons of soy from the United States for importation;
5. Postponement by China of threatened new and stricter export controls on rare earth minerals and the small electric motors dependent on them, for export to the United States and the world; and
6. Easing of some U.S restrictions on exports of certain chips to China. (U.S. Chip Restrictions)
7. Easing of Chinese controls on “legacy” automotive computer chip exports to the United States. (Legacy Chips)
A further element, introduced by Mr. Trump on October 31, was a vague undertaking to eliminate the other 10% of fentanyl tariffs on China if Chinese efforts to stem the flow of fentanyl and fentanyl precursors prove to be effective. (Zero Fentanyl Tariffs) If implemented, this would reduce the usual tariffs on U.S. imports of Chinese goods to around 35%. (The logic of zero fentanyl tariffs on China, 35% on Canada and 25% on Mexico has yet to be explained.)
II. Impact on Chinese and Other Investment in Mexico
For eight years, Chinese investment in America and third countries has been growing, with Mexico, Vietnam, and India benefiting in particular. It has been stimulated by the movement of goods’ production destined for the United States market from China to Mexico, third countries such as Vietnam and India, and to the United States. The incentives were multiple. First, the first Trump administration and the Biden administration strongly encouraged such producers to leave China and establish production facilities elsewhere, “delinking” from China. Many did so. (Delinking Destinations)
Secondly, the entry into force of the USMCA in July 2020 provided that goods produced in Mexico (and Canada) that met USMCA rules of origin would enter the United States duty-free, as they had under NAFTA. Goods coming within the Uruguay Round WTO tariff-elimination agreements (e.g., toys, pharmaceutical products) or the WTO's Information Technology Agreement (e.g., laptop computers) would also enter duty free. (USMCA, chs. 2,4)
Thirdly, goods that did not meet the rules of origin but could demonstrate a "substantial transformation" in Mexico would enter at U.S. MFN duties, typically at around 2.5- 3.5% ad valorem (such as non-USMCA compliant autos at 2.5%). (U.S. Tariffs 2024) Finally, experiences with natural disasters such as typhoons and man-made disasters such as COVID 19 convinced some (but by no means all) enterprises that thousands-of-miles-long supply chains raised unacceptable risks. (Some also worried about the environmental costs of such long supply chains.) (COVID-19 Impact on Supply Chains)
However, the situation changed markedly for many U.S. imports beginning in January 2025 with so-called "fentanyl" tariffs of 25% imposed on non-USMCA compliant goods from Mexico and Canada. (Fentanyl Tariffs) Even though aggregate U.S. tariffs applicable to imports from China reached 145% for several months, they were reduced to about 55% in May 2025 (May 2025 tariff reductions) While the United States has continued to treat imports from Mexico and Canada that meet USMCA rules of origin as duty free (with significant exceptions including autos and auto parts, steel, aluminum and copper, lumber, upholstered furniture and kitchen cabinets), many newer firms established in Mexico, Chinese and otherwise, will have to rely on non-North American supply lines for several years or more, as the Mexican government has long realized by reducing or eliminating import duties on essential parts and components. (IMMEX Program). Thus, they pay 25% duties when exporting to the United States.
That differential between 25% and 55% was apparently sufficient to make continued production in Mexico viable for many, mostly existing, enterprises, even for goods that did not meet USMCA rules of origin. But it was widely recognized that the lower tariffs were temporary, promised for only 90 days, a very short period for rational investment decisions. New "greenfield" investment continued to suffer, primarily because of the chaos and uncertainties created by frequent U.S. changes in tariff levels, but also because of the deteriorating Mexican investment climate under President Sheinbaum. Appointed judges at all levels were replaced in July 2025 with those elected in a process dominated by the governing Morena Party. In addition, a key judicial remedy, "amparo," designed to protect natural and corporate citizens for unconstitutional actions by the Mexican government has been emasculated. (Mexican Judicial reforms and Investment)
The situation as of November 2025 may be different. Although the truce coming from the trade deal is for one year, it could be shorter or longer. Shorter, because Trump tariff policy is always subject to unexpected changes. (Shorter Duration?) Longer, because the United States can no longer risk a resumption of Chinese export controls on rare earth minerals. (Rare Earth Leverage) Some stakeholders may well decide that the latter is more likely, but overall, uncertainty levels are likely to remain high.
For now, the tariff differential will be no more than 20%, roughly 45% for China compared to 25% for non-USMCA compliant goods from Mexico. In the event Mr. Trump were to make good on his July threat to raise the tariff on Mexico to 30% (not likely in my view), the 15% differential would be even less significant. Alternatively, eliminating the remaining 10% fentanyl tariff on China would reduce the differential to 10% (35% for China, 25% for Mexico), and the same level for Canada. The impact would not be immediate for investment in Mexico because of the aforementioned uncertainties, but for enterprises that have maintained production facilities in both China and Mexico, shifting some production back to China may be feasible and commercially desirable in the short term, with a negative impact on Mexican employment and exports. (The impact of lower tariffs on Chinese imports to the United States on reshoring from China to the United States may also be significant for some sectors where production is labor-intensive and ample factory capacity still exists in China.)
Even though Chinese hourly wages are somewhat higher than in Mexico (Comparing Wages), supply chains are shorter in China, with corresponding savings. Future changes in U.S. tariffs applied to Mexico are always possible, based on unrelated factors such as immigration, drug trafficking or border violence. Adding to such uncertainties is the possibility that the trade deal will not hold for the full year, on the one hand, or be extended on the other. Thus, even with the trade deal there is still no guarantee of stability in the United States-China relationship, in the factors that govern private investment decisions, or in U.S. policy toward Chinese activities in Mexico.
While the focus here is on nearshoring in Mexico, the negative impact on reshoring to the United States may be even more pronounced, because of the large wage differential between labor costs in China and those in the United States. There are obviously some sectors such as smartphones, where the increased costs of production in the US, and of developing new non-Chinese supply chains, are greater than the tariff differential at 35% or even 45%. (US Smartphone Production Costs)] But many other non-strategic goods, from toys to clothing to furniture to computer and other consumer electronic products, could never be profitably made in the United States or other high wage countries with or without high tariffs. (Made in China)
III. Ongoing Concerns about Chinese Goods from Mexico
It seems unlikely that the trade deal, even though it should reduce the intensity of the economic rivalries for some time, will change the perception of many Americans in Congress and otherwise that China represents an existential threat to the United States, economically, politically and militarily. Among other factors, the trade deal in my view will not alleviate U.S. concerns regarding increasing Chinese investment in and trade with Mexico, already reflected in Biden era prohibitions on imports of Chinese "connected vehicles" that might be assembled in Mexico for export to the United States. (Connected Vehicle Regulations)
In September 2025, in response to U.S. pressure that was driven by these concerns, Mexico proposed legislation that if enacted would restrict automotive imports, mostly from China, promising to raise tariffs from 20% to 50% for imports from countries with which Mexico does not have a free trade agreement. President Sheinbaum's proposal also contemplates tariff increases on 1400 other products, some of which are materials from China used in Mexican manufacturing. (Mexican Tariff Increases) China, Mexico's second largest trading partner, has strenuously objected and demanded discussions. (Discussions with China)
To further its push against such imports, the United States in the 2026 USMCA review may demand some sort of bilateral or trilateral investment review mechanism that could give the United States an effective veto of any planned new Chinese investment in Mexico. The United States and Mexico were reported in November 2025 to be discussing a Mexican version of the Committee on Foreign Investment of the United States (CIFUS).
Also, regardless of the trade deal, it seems highly likely that in the 2026 USMCA review the United States will seek to impose transshipment restrictions on Mexico (and Canada), designed for but not limited to Chinese-owned firms, to bar simple relabeling of goods as well as final assembly operations using primarily non-Mexican parts and components to make goods for export to the United States. However, there is a risk that they would be applicable to any products where Mexican value added is below a certain level. Such provisions have been included in recent trade deals between the United States and Malaysia and Vietnam, among others. The approach being developed by the administration is expected to define transshipment as occurring when a local factory, e.g., in Mexico, produces goods where the local value added from labor and materials is less than a predefined level. (US-Malaysia Agreement)
It is essential in my view that where Mexico and Canada are concerned, goods that meet USMCA rules of origin would automatically be exempted from any transshipment enforcement actions. The inclusion or exclusion of such a provision could be vital to preserving Mexican (as well as Canadian) manufacturing and employment and avoid the widespread replacement of U.S. imports from Mexico with those from China.
Most other aspects of the 2026 review should not be directly affected by United States-China trade friction. However, one of the stated goals of the Trump trade policies is to reduce trade deficits with other nations, as reflected in the negotiations with Vietnam (with which the United States has a $110 trade deficit for the first ten months of 2025). Vietnam Trade deficit) While this was not explicitly addressed in the trade deal with China, it may nevertheless have been considered by Trump and the members of his negotiating team. The U.S trade deficit in 2024 was about $295 billion with China and $172 billion with Mexico, but the differential in 2025 will be less because of the Trump trade policies. (Decreased Trade Deficit with China) Still, the new China trade deal with its lowered tariffs may permit China to maintain or event increase its still significant level of exports to the United States. Countries such as Mexico, with a growing trade surplus with the United States like Vietnam, may thus find themselves confronted with new demands to reduce exports or increase imports.
IV. Delinking, Nearshoring and Desirable USMCA Tariff Levels
In my view, with the newly lowered U.S. tariffs on Chinese-source imports, most incentives for delinking and nearshoring to Mexico, at least in the near term, have vanished. There is already increasing anecdotal evidence showing that firms producing goods in China for the U.S. market are staying put. Some may even reduce production in Mexico or Vietnam and increase it using existing or expanded production facilities in China. (Staying put in China) If businesses believe that the trade deal with China is good for a year and could be extended thereafter this trend could be prolonged. Where firms have a major domestic market in China, pressure to reshore to China by Chinese authorities, who in the past have opposed relocation out of China, could also occur.(Chinese Opposition to Reshoring) There is no apparent benefit to the United States in purchasing goods that have been reshored from Mexico (or Vietnam) to China.
While the United States may not wish to reduce import duties on non-USMCA compliant goods from Mexico and Canada below current levels (currently 25% for Mexico, 35% for Canada), the United States as well as Mexico and Canada would all benefit if those tariffs were lowered to no more than 15%, the general rate charged on imports from many other trading partners. Even more significantly, 25% tariffs on autos and auto parts, and 50% tariffs on steel, aluminum and copper, among others, could reasonably be reduced to zero under tariff rate quotas established by side letters, reflecting historic trade levels. At worst, auto tariffs for imports from Canada and Mexico should not be higher than the 15% level imposed on competitors in the EU, Japan and Korea. (Auto tariffs on EU, Japan and Korea)
In 2018, the United States gave special treatment to Mexico and Canada in USMCA with tariff rate quotas incorporated into side letters on automotive goods (Side letter on Autos). Later, the United States eliminated tariffs for steel and aluminum as an incentive for Mexico and Canada to ratify the USMCA. (Steel Tariff Exceptions) The United States could easily do both again if considered advisable.
Still, the risk remains that the October 2025 trade deal with China will allow China once again to increase its exports to the United States at the expense of other major trading partners, most of which like Mexico and Canada are subject to U.S tariffs levels not seen since the 1930s. This concern, if apparent next July, could further complicate the 2026 USMCA review.
V. Conclusions
Mexico will for the foreseeable future be affected by a Trump trade policy focused on China that complicates Mexico's trading relationships with both superpowers. The recent lower differential between tariffs applicable to China, and those applicable to other major trading partners such as Mexico, seems likely to significantly reduce incentives for nearshoring to Mexico and U.S. reshoring. Delinking, moving production from China elsewhere, is expensive and time-consuming. Often, the transplanted firms are still dependent on Chinese supply chains for parts and components. While pressures from Trump during his first term and from the Biden administration encouraged many enterprises, Chinese, American and others, to delink, such pressures have effectively disappeared.
Nor should observers expect U.S. courts to prevent the Trump administration from continuing to impose high tariffs on Mexico, Canada and other trading partners. Even if the Supreme Court disallows tariffs imposed based on the International Emergency Economic Powers Act), the administration has other, unchallengeable, legal bases for imposing historically high tariffs. These include Section 232 of the 1962 Trade Expansion Act, which provides the legal basis for the Trump tariffs on automotive goods, steel, aluminum, copper, lumber, furniture and others.(Tariff Legal Authorities)
Finally, the conflicts among the Trump trade policies are obvious. Detente with China was needed for U.S. producers, civilian and military, to preserve access to China’s near monopoly on rare earth refining and production of the essential magnets. However, by imposing high tariffs on every other major trading country at Smoot-Hawley levels (Hawley-Smoot Tariffs), China's relative strength in competing directly for sales in the U.S. market, including with Mexico, has been enhanced. Thus, while the resumption of Chinese exports of rare earth minerals and magnets may have been essential for the survival of the U.S. automotive and defense industries, among others, the narrowing of the tariff differential does not bode well for Mexico, or for U.S. producers who are not dependent on rare earth minerals.