US-China trade war winner: Mexico

Mexico has seen big gains in shipments to the U.S. in categories where competing Chinese goods were hit with tariffs, everything from poster board to air conditioner parts. In all, U.S. imports of goods from Mexico surged 10 percent to almost $350 billion last year, the fastest growth in seven years.

Background

Two of the world’s largest economies, the US and China, are involved in a months-long trade dispute. At the heart of the dispute are U.S. allegations of Chinese theft of intellectual property and unfair trade practices. Washington has accused China of stealing trade secrets and forcing American firms to hand over technology in exchange for access to the Chinese market. They are also locked in a dispute over their trade imbalance.

Trump imposed import taxes on $250 billion on Chinese products - 25 per cent on $50 billion worth and 10 per cent on the other $200 billion in July 2018. China retaliated by imposing duties on $110bn of US products. Trump had planned to raise the tariffs on the $200 billion to 25 per cent if he couldn’t get a deal with Xi at the G20 Summit.

Analysis

The Trump Administration’s trade war with China has turned out to be a windfall for another country the president frequently berates: Mexico. The ongoing trade war with China has helped widen America’s trade deficit with Mexico by 15 percent to more than $80 billion. Meanwhile, the growth in shipments from China slowed by about a third.

Mexico’s bonanza underscores the difficulty in trying to win a trade war where companies can shift production or find new sources to avoid tariffs. Despite Trump’s vow to reduce it, the U.S. trade deficit for goods globally hit a record $891 billion last year as tax cuts boosted demand for imports and retaliatory tariffs weighed on American exports. Given Trump’s early attacks on Mexico for taking U.S. jobs, it’s an ironic turn to observers.

Much of the shift in companies sourcing from Mexico instead of China centres on low value-added items where substitution is easier, according to Jorge Guajardo, a former Mexican ambassador to China. For example, Taskmaster Components has for almost 20 years imported large wheels and tires from China and assembled them for companies making trailers and recreational vehicles.

That list now includes Mexico, where it wants to invest in a factory. The U.S. isn’t being considered because Taskmaster hasn’t found a willing partner among the few remaining American manufacturers.

Mexico's gain is evident across a diverse span of sectors. After the U.S. levied tariffs on metal ores and their byproducts, Mexico’s exports to America more than doubled, while China’s sank by a quarter. Tariffs on aluminium products helped wipe out almost $500 million in imports from China. Mexico saw a 20 percent increase in sales to the U.S.

The trade war also made the U.S. more reliant on produce from Mexico, which was already the biggest source of vegetables like cauliflower, carrots and onions. In one stark example, peeled garlic cloves from China sank by almost a quarter after receiving tariffs while Mexican exports rose 54 percent.

Even small businesses in Mexico benefited. After the U.S. put 10 percent tariffs on silk yarn, one of China’s iconic exports, Mexico’s shipments to the U.S. jumped from basically nothing, just $5,500 in 2017, to $1.6 million last year. China’s imports of knitted and crocheted fabrics fell by about $3 million, almost the exact amount Mexican imports rose.

Trump’s tariffs especially targeted the auto supply chain, which had already been expanding in Mexico and has continued to gain under Trump's policies. One example: U.S. imports of Mexican passenger vehicles with gasoline engines jumped 17 percent to $32.6 billion, while shipments from China, Germany and Canada all declined.

Counterpoint

Even before Trump’s presidency, Mexico was becoming more competitive with China, in part due to rising Chinese labour rates and Mexico’s proximity to the U.S., especially important in the e-commerce era of quick shipping.

A lot was happening last year other than the tariffs that could have played a part in boosting Mexican exports. Some companies may have upped orders to beat Trump’s threat to dismantle the North American Free Trade Agreement; he instead signed a renegotiated deal in November. Fluctuations in the value of the dollar and Trump’s global steel tariffs might have also played a role.

Assessment

Our assessment is that Mexico’s gain from the ongoing US-China trade war is an unintended consequence for Trump, which has accused Mexico of undercutting US manufacturing through low wages. We believe that this shows that the US is still not capable of fulfilling its own demand for raw materials and semi-finished products, and is therefore not self-sufficient in many sectors of production.