As economic relations between the U.S. and China remain at arm’s length, America’s neighbor to the south is emerging as a key player in the global supply chain.

In recent years, Mexico has become a key outpost for Chinese firms looking to expand their manufacturing centers closer to the American markets. This tactic has led to controversy over “nearshoring” by companies looking to avoid strict tariffs imposed on China by U.S. authorities in recent years.

For more on this evolving cross-border issue, Marketplace’s David Brancaccio spoke with Santiago Perez, deputy editor for Latin America at the Wall Street Journal. The following is an edited transcript of their conversation.

David Brancaccio: All right, goods made in Mexico getting exported to the U.S. That is the point of the NAFTA Treaty and the revamped one that then-President Trump signed into law. What do you know, Mr. Perez, about Chinese companies routing Chinese stuff into the U.S. after a stop in Mexico?

Santiago Perez: Well, Mexican officials dispute that narrative. It’s not that Chinese investors are using Mexico as a bad or to circumvent USMCA trade rules. However, about 50 companies are behind most Chinese imports, and that includes U.S. manufacturers, but those are legal imports.

Brancaccio: But, of course, it would be legal for a Chinese company to have an operation in Mexico and to make something in Mexico, but it might have parts that came from all sorts of places, including China?

Perez: Under the rules of the USMCA, you need to comply with what’s called original content rules, so a percentage of output must come from North America. That’s very regulated within the auto sector, not so much in electronics. For example, Mexico is one of the world’s top exporters of TV sets, but essentially, Mexico is just an assembly point.

Brancaccio: And you know where you can see some of this is when Mexico’s economics minister said recently that he wants to boost domestic Mexican supply chains so that more stuff from Mexico is Mexican on the inside. Am I reading that right? Or at least in North America?

Perez: Yeah, in a way, I think they are anticipating to the new reality after the U.S. election. Regardless of who wins, the Mexican government is seeing a trade war with China, and we have a USMCA review in 2026 with consultations starting next year. So what the Mexican government has done so far is that it’s holding informal talks with the largest importers of Chinese goods, and that includes a lot of U.S. firms.

Brancaccio: And the landscape could be changing. Former President Trump, on the campaign trail just the other day, suggested, I think it was 200% tariffs on car and truck imports from Mexico, which I think would contravene the new NAFTA that he signed.

Perez: Mexico is also a heavy importer of U.S. goods, especially for autos, but also raw materials that are essential, for example, for breweries that then export, for example, Modelo beer, which is the number one beer these days in the U.S. So the level of integration in North America is quite heavily integrated, so it won’t be easy to impose unilaterally such high tariffs. And the thing is that you have a risk of retaliation as well, so that also needs to be taken into account.

Brancaccio: We did some coverage about this in 2023 last year, Mexico passed China as the number one importer to the U.S. But some of that isn’t really China, right? It’s that after pandemic, a lot of companies rethought supply chains, and Mexico’s nearby.

Perez: Still, there are some significant constraints, in part because there’s not enough electricity or water, which is crucial for industrial parks, for example. So that’s one of the problems that Mexico is facing right now, but the idea would be to create a stronger North America vis-a-vis China and the global trade dynamics.