Ford Motor Co. said Tuesday it is scrapping plans for a new $1.6 billion assembly plant in Mexico, instead choosing to build small cars in an existing Mexican factory, and invest $700 million in a Michigan facility that will build electric vehicles.

The move is a surprising turnaround for Ford after facing criticism by President-elect Donald Trump for more than a year in relation to its Mexico plan. Last month, Chief Executive Mark Fields said it was looking to work with the incoming administration on Mr. Trump’s trade agenda,...