16 Apr 2026 Chinese Factories in Mexico: Real Cost Savings, Hidden Legal Landmines for U.S. Importers
Written by Jeffrey Cartwright, Managing Partner
Western View of Rule of Law
Laws exist to regulate or limit the behavior of companies and individuals. Such a law is viewed as superior to individual behavior, and all individuals must comply with it or face penalties for not doing so. That is not to say that individuals and companies do not try to work around the law or find a loophole, but compliance is generally high. Further, the Western concept of the Rule of Law promotes fairness.
Chinese View of Rule by Law
The Chinese Communist Party (CCP) views law as a tool to wield power. Rather than law limiting behavior of companies and individuals. It views the law as a tool to advance its policy and political goals. What that means as a practical matter is that advancing policy is more important than adherence to a law. One of these purposes is to maintain the monopolized leadership of the CCP. Laws are used to control the behavior of the population.
When applying a law, the judicial system will seek to maximize the political objective. If that means ignoring the law or determining that it does not really apply in a particular circumstance, that would be viewed as acceptable and achieving the higher purpose. The concept of fairness does not really exist when the law is applied.
There are two sides to the law. It is for the Chinese to work around to achieve the higher goal, and it is to limit Westerners and limit their ability to compete favorably.
Chinese Concept of Agreement vs Western Concept of Agreement
Robert Lighthizer (US Trade Representative in the first Trump administration), in his book No Trade Is Free, explained the difficulty of negotiating a trade agreement with China. This difficulty goes beyond differences of objectives but extends to the meanings of specific words. One of the words that there was significant disagreement over was the English word “shall”. To the United States that has a simple, straightforward meaning, as in will do. However, in Mandarin, the term is either “ying” or “jiang”, both of which translate as “shall”. There were extensive battles over which word was to be used in the agreement, which was being finalized. The United States” language-experts believed that the term was “ying” as it represented an obligation to perform. The Chinese language-experts believed that the term was “jiang” as it represents a future tense relating to something that a party to the negotiations intended to do. As an intention, it was not binding.
Another example of a misunderstanding was the startup of an articulating ladder product at one of my partner factories in China for a shipment to a major retailer in the US. Prior to this project, we had been purchasing different style aluminum ladders from a contract manufacturer in China for several years. The factory had installed equipment to melt aluminum ingots and produce large billets for feeding aluminum extruders. These extruders would produce various profiles for rails and steps for the ladders. In listening to videoconferences concerning the specifications and start-up plan, I began to feel uncomfortable as to whether or not the factory would meet the schedule required for shipping so that my company would have the quantities needed to ship orders on time to meet the customer in-store date for the new product. The consistent report from the factory was that manufacturing was going well and that there would be no problem meeting the date for loading containers. As I was not convinced that would happen, I flew unannounced to China and arrived at the factory on a surprise visit to verify the production schedule. When I arrived, there were no containers being loaded, none of the assembly lines were in production on this new product, and no aluminum rails or steps had been extruded with parts cut to length and parts tempered. Perplexed, I asked the factory owner how it was that the product was being manufactured. He explained to me that the aluminum factory was producing the required billets to supply his factory and that, technically, the product was being manufactured. He was correct, but he was also deceptive. From that point on, I would ask my questions at a more granular level.
Culturally, the “Three D’s” – deception, deflection, and denial are core principles when the Chinese approach business relationships. Trust is possible, but it takes a very long time to develop.
The above examples illustrate some of these cultural differences. Combined with language differences, both sides should be careful to ensure that the other side understands and is in full agreement. Otherwise, one party to the negotiation will feel that the other side violated the agreement.
Practical Considerations when Sourcing with a Chinese Factory Operating in Mexico
Consider the Chinese operating a factory in Mexico, given the above differences. Several potential issues can arise as they routinely occur in China.
- Product Quality. All is well until costs increase. The factory will often make price the major concern and substitute materials or cut corners without requesting authorization to do so or even believing that it is necessary to inform the customer. In China, my company had major issues with this despite signed, written agreements to never make a change without our knowledge and requisite testing to ensure that the finished product met customer needs.
- Bill of Materials and Product Costs. It is difficult to obtain an accurately priced bill of materials from a factory in China. It is common that there are multiple versions of a bill of materials. This is not because prices change over time, but because it is viewed as acceptable to have one version to show a customer and a second (accurate) version with which to operate a factory. I found this to be particularly true when a factory is part of an anti-dumping investigation. One bill of materials and supporting invoices for the cost of the materials that is accurate ,and one that is shown to US International Trade Commission (USITC) Office of Investigations for the purpose of evading of an anti-dumping duty which is based upon invoices created for that purpose.
- Made in Mexico Requirements for USMCA Tariff Avoidance. In China, there are some certifications required as to the origin of product or materials used in the manufacture of the product. These are related to forced labor or child labor. Some Chinese companies have flaunted these rules through false documentation. While in Mexico, neither of these exists, other potential issues have already been identified. To avoid a 25% tariff for products manufactured not in compliance with USMCA content rules, the product must have most of the value-added content (greater than 50%) from Mexico.
In automobile manufacturing, the content rules are higher. It has been reported that several Chinese factories in Mexico have claimed “Made in Mexico” when, in fact, the content is largely imported from China. Back to the Rule by Law perspective, this is acceptable as it meets the CCP’s goal of retaining as many factory jobs in China as possible. Since the factories self-certify as meeting this requirement, it is a simple task to produce Certificates of Origin (COO) that document (falsely) the origin of the product.
Note that this risk is real, as a Chinese owner has presented this as a solution to the difficulty of finding enough Mexican factories that are making the necessary components today. The solution is to look more extensively for Mexican sources or to install equipment in Mexico and to localize the manufacturing of more components in Mexico.
This presents two issues. First, with the Mexican government, who believe that its laws must be followed, or it may revoke the legal registrations of these companies and impose fines. Second, with the US importer who can be held liable for tariffs on these products when audits are conducted. Even with the shipping of product via Delivered Duty Prepaid (DPP) by the Chinese factory, this violates USMCA, and the US client is liable. Note that to prevent violation of the content rules, the US requires auditable records with certificates of origin (COO) being retained for 5 years from date of shipment.
Real Competitive Advantages of Chinese Factories Operating in Mexico
Despite the above risks, there are significant advantages to a US client importing from a Chinese contract manufacturing factory operating in Mexico. These include:
- Knowledge of US products (that historically have not been manufactured in Mexico) and manufacturing processes to manufacture these products with costs similar to China production.
- Avoidance of 301 tariffs that the US has on Chinese imports (if the majority value-added content is Made in Mexico).
- Shorter lead times which result in less inventory overall.
- Speed of quotation process which is one to two weeks in China and sometimes several months in Mexico. Also, quotations in Mexico tend to start high with decreases over multiple rounds with multiple vendors, whereas quotations from China tend to be much more competitive on the first bid. The Mexican business culture is entrenched, and this has made it difficult for factories provide more competitive first-round quotations and to provide a much faster quotation process.
- Proximity to the United States for travel for factory visits and for ease of meeting, as Mexico and US are in the same or nearly the same time zone.
- Clearer communications with many bilingual engineers and managers in Mexico and the US.
- Product development resources in, while manufacturing in Mexico, which allows US clients to have less product development resources on their staffs in the US.
- Provision of the entire bill of materials. This is different between Mexico, which is more of an intermediate goods producer that sends parts to another factory, and China, which is more of a finished goods producer. In China, the factory will quote the entire bill of materials whereas this is rare in Mexico, and the client or a sourcing firm like Shoreview must assemble the bill of materials from different factories.
Executive Summary
The business culture in Mexico and in China has both been beneficial to US importers over the years. Mexico recently surpassed China as the largest US trading partner as a result of the US trade war with China and the resultant significant tariffs on Chinese products imported into the United States. For products “Made in Mexico” (defined currently as over 50% Mexican content) there is a zero percent tariff and duty under USMCA.
Chinese companies are now setting up operations in Mexico, which allow them to take advantage of the lower tariff regime. However, it is apparent that Chinese companies want to retain as much manufacturing of the product in China as possible so as to provide employment to the maximum number of Chinese factory workers. This works well when the content exceeds 50% through value-added operations and localized content. The issue is that in China, working around the law is common and has oftentimes resulted in deliberate falsification of documents. Practices such as child labor and forced labor exist in China, yet the Chinese factory owner knows how to ensure that it does not become known to the US importer.
These practices are not acceptable and have the potential for the Chinese factory in Mexico to be investigated, fined, and possibly de-registered. For the US importer who has the ultimate responsibility to ensure that its product fully complies with US laws and treaties, this can have serious implications.
Shoreview has operated extensively in both China and Mexico for decades. By leveraging these experiences, we are able to bridge cultural differences and have delivered successful results in the majority of Nearshoring projects over the last 8 years.
Our ability to sense potential issues and resolve them before serious difficulties arise is unique to Shoreview. Many importers are unaware of these differences and trust that the way business is done in China is the way business is done in Mexico, and that is simply not always the case. Ronald Reagan said it well when he said, “Trust but Verify”.