Pressure From the North: How US Grand Strategy Shapes Mexico

Evolving International Order

The rules-based international order built after WWII is rapidly changing. Great powers like China, Russia, and the United States are shifting away from consensus and diplomacy toward an international system reminiscent of the 19th century. At its center is the U.S.-China rivalry, a great-power competition that by itself is redrawing the rules for every state within its sphere of influence. Unlike in previous centuries, this competition is defined not only by geopolitical and military rivalry but also by geoeconomics — the strategic use of economic tools.

Since the early 2000s, China has pursued an investment strategy that supports its strategic sectors abroad — financing infrastructure, technology, and energy projects to gain access to natural resources and global markets. Unlike Western firms, Chinese companies operate under significant state influence, parlaying investment into control over key industries. By securing vital economic chokepoints — particularly in critical minerals — China has positioned itself at the forefront of the next decade’s essential technologies.

To counter China’s approach, the U.S. is adjusting its strategy to cut reliance on Chinese-controlled supply chains, deny access to strategic technologies, and pressure other countries to support U.S. geoeconomic interests. Latin America has become the focal point of these efforts. The revival of the Monroe Doctrine — originally a warning against European interference in the Western Hemisphere — now provides the strategic depth needed to forge renewed alliances and secure new supply chains. Washington’s approach has become more mercantilistic and less restrained, targeting both friends and foes alike with trade, technology, and infrastructure becoming instruments of geoeconomic pressure.

This shift has significant implications for Mexico, which has relied on U.S. capital and markets for over three decades. Washington is now leveraging this long-standing integration into the North American economy to obtain greater concessions. This brief evaluates the evolving U.S.-Mexico dynamic and explores how Mexico can navigate this increasingly difficult situation by addressing three main questions: 

1. What structural factors are reshaping the bilateral relationship from an economic alliance into an association characterized by geoeconomic leverage?
2. How are domestic conditions and policy choices in Mexico amplifying its vulnerability to this shift in American foreign policy?
3. What can Mexico do to reduce its vulnerability to Washington’s choices?

Mexico’s Structural Economic Dependence

Mexico’s vulnerability to the recent turn in U.S. foreign policy stems from its proximity, historical ties, and ongoing integration since the 1990s. Several key metrics illustrate the scale of this trade relationship: 

• Export reliance: The U.S. market accounts for over 80% of Mexican exports.
• Import depth: The U.S. supplies 41% of Mexico’s imports.
• Capital investment: Since the 2000s, 47% of Mexico’s accumulated foreign investment has originated in the U.S.
• Market concentration: Mexico’s trade with the U.S. is 15 times greater than with Canada, its next largest partner.

This framework is supported by more than thirty years of formal commercial ties, beginning with the North American Free Trade Agreement (NAFTA), and continuing today under the United States-Mexico-Canada Agreement (USMCA).

The depth of dependence extends beyond trade: 

• Industry: As Mexico’s primary supplier of intermediate goods, the U.S. is essential to the Mexican industrial base — any bilateral disruption could be damaging. This vulnerability is compounded by the IMMEX program, which incentivizes the import of intermediate goods over domestic sourcing, thereby limiting backward integration with domestic suppliers.
• Energy: Mexico relies on the U.S. for 70% of its fuel consumption. Despite government efforts to expand domestic refining, the country remains acutely dependent on U.S. gasoline and natural gas imports.
• Finance: Key financial dependencies include the U.S. Federal Reserve’s influence on the peso and the approximately $62 billion sent annually by migrants in the U.S.

The U.S.-Mexico economic relationship is fundamentally unbalanced. While technically interdependent, the leverage held by each partner is not equivalent. Mexico is considerably more sensitive to shifts in U.S. policy, and its integration with the American economy has become a multichannel source of external pressure. Washington exerts direct influence over key areas of Mexico’s industrial base, financial conditions, and capital flows. This vulnerability has become more apparent as the U.S. increasingly integrates geoeconomic considerations into its broader strategic competition with China.

Mexico’s Internal Economic and Institutional Vulnerabilities

Mexico’s predicament is not solely a product of the bilateral relationship. For decades, successive administrations have prioritized growth over a comprehensive development strategy. Foreign Direct Investment (FDI) can only foster development when paired with policies that distribute value across the domestic economy — which Mexico has failed to do. More recently, specific policy choices have weakened Mexico’s hand in the face of the U.S.-China competition. Rather than improving Mexico’s position, these actions have intensified its exposure.

Constraints on Domestic Innovation

Mexico’s research and development (R&D) spending is 90% below the Organisation for Economic Co-operation and Development (OECD) average, limiting its domestic innovation capacity. This ongoing underinvestment is mirrored in the workforce: Mexican graduates lack specialized skills, leading to widespread industry dissatisfaction and a 32% labor shortage in high-value sectors.

Persistence of Market Informality

Mexico’s economy is weighed down by a sharp internal divide. While the informal sector employs 54% of the workforce, it generates only 25% of gross domestic product (GDP); its low productivity effectively offsets growth in the formal sector. This is compounded by market concentration, where large oligopolies stifle competition and innovation. For example, América Móvil maintains a 61% market share, more than triple its nearest competitor. This lack of competition translates into a 16% loss of household income to overpriced goods and services.

Weakening of Regulatory Oversight

Nearly all independent regulatory bodies have been eliminated, including those that reassured investors of a level playing field in energy, telecommunications, and antitrust. By folding these functions into executive departments, the administration has blurred the line between regulator and participant. This change raises significant concerns that the government is now acting as a direct economic competitor while simultaneously regulating the very markets in which it operates.

Challenges to Judicial Independence

Another critical issue is the dismantling of institutional safeguards, most notably through judicial reforms that mandate the election of judges by popular vote. According to an N+ (Nmas) survey, 84.2% of the new court rulings favor the government, an unusual trend in modern democracies. In addition, 66% of decisions favor the presidency, with only 28.1% in favor of states and municipalities, increasing concerns about judicial independence. This apparent erosion of the rule of law, alongside the lack of independent regulators, generates uncertainty and deters new investors. The impact is visible in the composition of FDI: 80% now consists of reinvestment, while new investment has fallen to its lowest level since the early 2000s.

Accumulation of Strategic Economic and Political Risk

These internal constraints create a compounding risk. Underinvestment in R&D and the workforce skills gap limit the economy’s absorptive capacity, anchoring Mexico at the lower end of global value chains, where substitution risk is highest. Meanwhile, the large informal employment sector and oligopolies make the economy dependent on foreign innovations and a few gatekeepers. As institutional erosion limits investment dynamism, Mexico’s bargaining power continues to diminish, leaving it to face a more assertive U.S. from an increasingly weakened position. The effects are already being felt: 

• Greenfield investment has evaporated and companies are postponing or cancelling expansion plans.
• Public investment has fallen dramatically.
• Formal employment is falling while the informal economy keeps growing.
• Annual GDP growth has been under 1% for nearly a decade.

All these factors complicate Mexico’s fiscal position, as the government relies on debt to fund current expenditures while failing to address a widening budget deficit.

US Influence in Practice

The United States’ increasing pressure on Mexico is illustrated by three strategic developments spanning resources, investment, and security.

Access to Strategic Resources

Perhaps the most consequential example of U.S. pressure is the recent agreement regarding Mexico’s rare-earth reserves. Essential for electronics and advanced technologies, these resource were originally slated for state-led development through LitioMX and other state enterprises. However, this plan was effectively bypassed in February 2026 when Mexico and the U.S. announced a joint framework for rare-earth exploitation, granting American companies access to Mexican deposits and overriding previous state-led efforts. This outcome highlights that, regardless of its domestic policy goals, Mexico lacks the leverage to withhold strategic assets from Washington.

Constraints on China-Mexico Economic Integration

Chinese investment has emerged as a primary flashpoint in the binational relationship. When BYD, a large Chinese electric car manufacturer, announced plans in 2024 to manufacture 150,000 electric vehicles in Mexico — a move designed to take advantage of USMCA rules of origin and bypass U.S. restrictions — Washington responded with significant diplomatic pressure, using the upcoming USMCA renegotiation as a bargaining chip. Mexico subsequently blocked the plan and imposed tariffs ranging from 5% to 50% on countries without a Free Trade Agreement (FTA) with Mexico, indirectly targeting Asian countries such as China. These actions suggest that Mexico’s ability to counter U.S. pressure is limited, and Chinese involvement in Mexico’s economy will likely remain low. 

Deepening Cooperation in Security Policy

On February 22, Mexican special forces killed Nemesio Oseguera Cervantes, known as “El Mencho,” the leader of the Jalisco New Generation Cartel (CJNG). The operation relied on pivotal U.S. intelligence., and President Donald Trump claimed credit for the operation, while Mexico asserted that it was a sovereign decision with foreign coordination. Mexico has also increased extraditions of high-profile criminals to the U.S. and will likely grant it access to ground operations in Mexican territory. Although Mexico continues to pursue a bilateral framework to maintain some sense of control, these recent developments demonstrate Washington’s growing influence over Mexican law enforcement.

Trajectory of Strategic Alignment

These three examples illustrate a common trend. Washington is increasingly urging Mexico to align with America’s strategic goals and provide access to its resources when necessary. The U.S. is exerting pressure on multiple fronts to secure rapid concessions — a process aided by Mexico’s internal vulnerabilities, which hinder its ability to mount an effective response.

Plan Mexico and Domestic Policy Constraints

In January 2025, Mexico unveiled Plan Mexico — a national industrial strategy to boost economic growth and development. The plan is driven by 13 objectives that together seek to position Mexico among the top 10 largest economies, add 1.5 million jobs, increase FDI at 25% of GDP, and improve domestic value-added industrial content.

One year later, the plan has largely faltered, as evidenced by several key economic indicators: 

• GDP contracted by 0.8% in the first quarter of 2026.
• An estimated 127,000 jobs are projected to be lost.
• FDI as a share of GDP has declined to 22%.

The plan’s initial shortcomings stem from a limited account of Mexico’s structural realities. By setting ambitious targets and focusing primarily on North American integration, the proposal underestimates critical domestic constraints. Legal uncertainty, political volatility, and recent policy reforms have weakened the investment environment the plan seeks to strengthen.

Policy Recommendations

Mexico’s options are constrained but by no means exhausted and the key to reducing vulnerability lies in domestic resilience rather than external reliance. The following recommendations provide a roadmap to address internal weaknesses while pursuing strategic diversification.

Strengthening Strategic Partnerships

To reduce over-dependence on the U.S. market, Mexico should pursue a dual-track approach of global diversification and regional leadership, bolstered by a revitalized diplomatic capacity: 

• Global diversification: Forge partnerships with other countries to acquire specialized expertise, such as leveraging Australia’s rare-earth capabilities and South Korea’s advanced supply chain frameworks.
• Regional integration: Reassert Mexico’s position within Latin America by championing economic integration. Utilizing its status as a regional heavyweight, Mexico should lead bloc-wide initiatives that prioritize risk management over political ideology.
• Diplomatic modernization: Strengthen the foreign service and diplomatic apparatus to ensure these partnerships are sustained by institutional strategy.

Enhancing Structural Stability

While further restructuring of the judicial system may be politically unfeasible, strengthening secondary legal frameworks could help restore institutional credibility and investor confidence: 

• International arbitration: Establish a specialized arbitration system for foreign capital that aligns with global standards to provide a secure alternative for dispute resolution and improve legal certainty.
• Regulatory reinstatement: Restore independent regulators in key areas — such as economic competition and energy investment — to ensure a stable market environment.

Prioritizing such complementary mechanisms that shield investors from domestic political volatility is a way to rebuild trust without requiring immediate constitutional overhauls.

Toward an Integrated Industrial Policy

Mexico should adopt a proactive industrial strategy that shifts the focus from simple assembly to high-value production through three core pillars: 

• Specialized innovation hubs: Establish regional clusters where education, fiscal incentives, and infrastructure converge to foster domestic technical capabilities.
• Localized supply chains: Incentivize multinational corporations to source locally and collaborate more deeply with local suppliers.
• Technology diffusion: Facilitate the diffusion of global technical expertise into the domestic economy, so foreign investment can serve as a catalyst for local industrial growth.

Conclusion

The recent shift in U.S.-Mexico relations represents a structural realignment driven by the United States’ great-power competition with China. Securing the Western Hemisphere has become a bipartisan U.S. priority, particularly amid concerns about China-linked supply chains. As a result, Mexico faces heightened scrutiny and a continued reduction in its strategic autonomy.

Although asymmetric interdependence with the United States will endure, the gains Mexico derives will depend on its political leadership. The status quo is no longer viable: Without a clear internal reassessment, Mexico risks marginalization as an emerging power, while remaining constrained by U.S. priorities.

With decisive action, Mexico could leverage its geography, manufacturing base, and existing integration as an entry point into the world’s largest market. However, current trends suggest a trajectory of decline. Failure to recognize these shifts will leave Mexico increasingly shaped by U.S. geoeconomic imperatives, and the Mexican population will bear the costs of this strategic inertia.

This publication was produced by Rice University’s Baker Institute for Public Policy. Wherever feasible, the material was reviewed by outside experts prior to release. Any errors or omissions are solely the responsibility of the author(s).

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author(s) and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s) and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.