“China could trigger a trade war between the United States and Mexico

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According to this data, Mexico surpassed China in 2023 and became the top exporter to the United States. The value of goods sold has continued to increase, reaching nearly $476 billion for the year; the equivalent figure for Chinese goods fell sharply, from $536 billion in 2022 to $427 billion in 2023.

The last time Mexico surpassed China, in 2002, it was a blink (and then Canada took the top spot). Currently, its rise heralds a new order in world trade. Data from January 2024 shows that the trend remains firm. U.S. efforts to decouple from China and bring supply chains closer are intensifying, pushing trade through other countries. An updated free trade agreement between the United States, Mexico, and Canada, known as USMCA, has been in effect since 2020. It supports Mexican exports of auto parts, medical supplies, and agricultural products to the United States.

But the third side of this commercial triangle, between Mexico and China, is creating tensions. Chinese companies have not stood idly by while incentives were created for companies to look beyond their shores. They have been pushing in the same markets that the United States intends to supplant China, including Mexico. This means that many Chinese exports are simply taking ‘a slightly longer road to get to the same place,’ says Ana Gutiérrez, from IMCO, a think tank in Mexico City.

China seems to be promoting this strategy. In December, the country’s leaders stated that it was a priority to export products used to manufacture finished products, rather than the finished products themselves. Mexico is an attractive beachhead into the United States because the USMCA provides tariff-free access to goods manufactured with sufficient North American content.

Mexico’s official customs data does not show a sustained influx of goods from China. But some U.S. officials and industrialists believe that Chinese entries are being underestimated, deliberately or not. The suspicion is that Mexico turns a blind eye to imports from China and that these are re-exported to the United States.

Steel and aluminum are the main concerns. In February, Katherine Tai, the United States Trade Representative (USTR), pointed out a ‘lack of transparency regarding Mexico’s steel and aluminum imports from third countries.’ In December, Mexico imposed tariffs of up to 80% on some steel imports from China, but U.S. officials remain frustrated. One thing is to set tariff levels, and another is to enforce them. ‘What we have seen is that the USMCA has really become an agreement between the U.S., China, and Mexico, where China transports many products through Mexico,’ says Jeff Ferry, from the Coalition for a Prosperous America, a group that represents manufacturers.

Electric vehicles are an imminent concern. The average price of an electric vehicle in China is approximately half that in the United States, and China produces more than half of the world’s output. Without high tariffs, sales of Chinese electric vehicles in the United States would likely skyrocket, as has happened in other countries. The administration of President Joe Biden is considering increasing tariffs on vehicles above their current level of 25%.”

The USMCA has rules against subsidies and unfair market practices, which are common among Chinese companies. But in many cases, no law or rule is broken. Mexico offers Chinese automakers a way to circumvent the tariff wall because the USMCA’s rules of origin contain what a U.S. official calls “loopholes” that allow the integration of Chinese components. An importer can assemble Chinese components in Mexico and label Mexico as the country of origin, hiding Chinese participation. “New tools may be needed,” the official says.

In Mexico, there is already a large automobile manufacturing industry, and Chinese money is pouring in, especially in the northern states, which are the largest exporters to the United States. In February, Byd, China’s most successful vehicle manufacturer, said it would manufacture 150,000 vehicles a year in Mexico. Byd claims that the production will serve the local market, but many companies have their sights set on the larger and wealthier market north of the border.

Chinese direct foreign investment in Mexico reached $2.5 billion in 2022. Margaret Myers, from the Inter-American Dialogue, a Washington think tank, notes the “remarkable growth” of sophisticated manufacturing by Chinese companies in Mexico.

Without China in the Chain

What could the United States do about it? In the case of steel and aluminum imports, it could copy its approach with the EU and Japan, where there are limits to the volumes that can be imported at lower tariffs. Higher tariffs come into effect when those limits are reached. When the Trump administration lifted tariffs on steel and aluminum from Mexico in 2019, it did so on the condition that Mexico contain increases in exports to the United States.

Electric vehicles are more complicated. Some would like the new rules to completely eliminate China from the supply chains. “If you want to be a trading partner of the United States, we’re not going to allow your country to be a stopover point for products coming from China,” says Ferry. This would imply restrictive rules of origin and a stricter enforcement regime. It would also raise thorny issues about how to treat the production of Chinese-owned factories in Mexico.

Robert Lighthizer, who was the chief trade negotiator during Donald Trump’s presidency, has said that a first step would be to strip China of its most-favored-nation status. That would automatically raise tariffs on Chinese products in general. Enrique Dussel, from UNAM, a university in Mexico City, says this would destabilize the global trading system. “The United States [would be] saying ‘adopt my rules or you’re against me’.”

If Trump wins in November, he is likely to take a tougher stance toward Mexico. In addition to Chinese trade, there is also the issue of migration. But most importantly, Trump detests trade imbalances. The United States’ trade deficit with Mexico amounted to $152 billion in 2023, a 17% increase from 2022. In 2026 Mexico and the United States, along with Canada, have to discuss whether to extend the USMCA for another 16 years, so that it expires in 2052 instead of 2036. Trump signed the USMCA, but that is no guarantee that he will not discard it or use its extension as leverage to extract concessions from Mexico. He has already talked about a 10% tariff on the import of goods from all countries, which is not possible for Mexico and Canada under the USMCA rules.

Mexico seems unprepared, says Dussel. Claudia Sheinbaum, who is expected to be elected the next president of Mexico in the June 2 elections, is promoting “nearshoring” to boost growth.

Source: Infobae