PROTECTIONISM OR GREAT POWER COMPETITION?

The trade war between the US and China began in March 2018 and intensified with new semiconductor tariffs in 2024. The US has pressured Mexico to reduce its ties with China and strengthen them with North America, as it did with the signing of the T-MEC. The renegotiation of T-MEC in 2026 will introduce new conditions. The pressure turned to applying tariffs on 99 per cent of Chinese imports. This article will analyse Mexico's position in the trade war between the two great powers. (For more details, see the OBELA box)

A relationship of subordination exists between Mexico and its northern neighbour. According to Susanna Hast (1) Spheres of influence, a concept in international relations, are a response to the disintegration of the state system and the formation of a global community. In this context, international relations revolve around spheres of influence, where powers recognise each other and small states recognise the hegemon.

Mexico charges 15-25% in tariffs to countries with an automotive industry or do not have a free trade agreement, starting in 2021 and rising. The central countries affected are China, South Korea and India. The Ministry of Economy argues in the decree establishing various Sector Promotion Programmes, published in the Official Journal of the Federation (DOF) on 12 July 2019 based on General Axis III. Economy of the National Development Plan 2019-2024. It establishes in its objective "Promoting economic recovery, the domestic market and employment" to ensure that the economy returns to growth at acceptable rates, that the aim is to protect national industry, it is based on Washington's protectionism for the combustion and electric automotive industry and to prevent the triangulation of these branches to the US market.

Tariffs protect the US economy in the logic of North American security. As Mexico belongs to the sphere of influence of the great US power, it subordinates its trade policy to this relationship because it fears losing its primary export market, foreign exchange, and migrant recipients. Mexico is the leading exporter of migrants on the American continent, measured per 10,000 inhabitants; 97% of Mexican emigrants arrive in the United States (2)

The main products on which Mexico has implemented tariffs published in various DOFs include:
- Steel: There is a 15% tariff on hot-rolled flat steel of Chinese origin, irrespective of the country of origin. The countervailing duty is USD 0.1874 per kilogram for imports of coated flat steel of the exact origin.
- Pre-strengthened wire ropes: tariff of 5% Definitive countervailing duty of USD 1.02 per kilogram.
- Seamless steel pipe: definitive countervailing duty of $1,252 per metric ton.
- High carbon ferro-manganese: 21% countervailing duty in force for five more years, starting 26 September 2018, renewed in 2023.

Table 1 shows the percentage that each product represents in Mexico's imports, as well as columns III and IV, the percentage of these imports from China and the US, respectively. Mexico even imposed tariffs on products such as pork and rice imported from the US and not China, although they are not a significant good. Electronics and electrical appliances have a greater weight in imports, the former being dominated by China with 27% and followed by the US with 21%, the latter being dominated by the US, doubling the Chinese percentage. The most affected products are footwear, toys and chemical products.

Historically, the northern neighbour has been Mexico's leading trading partner, reinforced by the North American Free Trade Agreement (NAFTA), the predecessor of the US-Mexico-Canada Agreement (T-MEC). It fostered integration in the region, which has resulted in lower economic growth at the cost of increasing Mexico's vulnerability to changes in the US economy, already exposed on multiple occasions, such as with the 2008 crisis and the decline in economic growth over the past two decades.

Mexico's growing interdependence with China has raised concerns for its northern neighbour, Mexico's leading export destination, due to the significant presence in Mexico's imports from the Asian giant and the vulnerability of supply chains. China is Mexico's second-largest trading partner after the US. Relations in the electronics, automotive and manufacturing sectors have increased, which has led to low economic growth, as shown in Figure 1, due to the lack of backward linkages in Mexico. Since the signing of NAFTA, Canada and Mexico have concentrated their foreign trade with the US, which has been a critical source of intermediate inputs for several production processes. However, the reverse is not necessarily true.

The input-output (IP) model shows the interdependence between the productive branches of an economic and geographical space. Aroche (3) developed an input-output matrix for North America 2005, showing the inter-sectoral exchanges within the production structure, the final demand sub-matrix, and the value added sub-matrix. It concludes that the most developed economy has the most interdependent sectors and branches. Less developed economies are less integrated and more heterogeneous, and sectors cooperate less. The US economy and, to a lesser extent, the Canadian economy are more articulated than the Mexican economy.

According to Liu Xuedong Trade flows are bilateral between China and Mexico, Mexico and the United States, and trilateral China-Mexico-US flows link the three. Mexico has become a manufacturer with a growing presence of Chinese products in the US market.

Since 1994, imports from China have fuelled export industries to the United States. In addition, consumption of Chinese products has grown (see Table 2). All this leads to a significant growing deficit that the US should add to its external deficit with China because Chinese products are Chinese inputs for its production.

The total North American deficit of the TMEC countries adds to US$408.19 billion, with China in 2022, led by the US, which directly holds 82% of that deficit. Most of the rest is also part of the US deficit through either Canadian or Mexican exports to the US as assembled goods with Chinese parts. From 2017-2022, Chinese exports to Canada have increased at an annualised rate of 73.5%, from US$2.83 billion in 2017 to US$44.6 billion in 2022. In the same period for the United States, it has grown at an annualised rate of 58.6%, from US$12.7 MM to US$128 MM. Mexico has grown at an average annualised rate of 169%, from US$387M to US$55M. In 2023, Mexico's exports to China amounted to a quarter of its imports, more than $18 billion, but its imports exceeded $81 billion, resulting in a trade deficit of $62 billion for Mexico.

The measures do not affect 55% of imports from the US under the free trade agreement but aim to protect the US market by preventing the re-export of products or components from Mexican territory. The re-export of Chinese products is an essential component of the Mexican manufacturing sector that these tariffs and restrictions will hamper.

President Joe Biden, in May 2024, announced an increase in tariffs under Section 301 of the Trade Act of 1974 on $18 billion of imports from China to protect American workers and businesses. Work with partners worldwide to strengthen cooperation and address shared concerns about China's unfair practices. Not to weaken alliances or apply indiscriminate 10% tariffs that would raise prices on all global imports, regardless of whether they engage in unfair trade. The president ordered tariff increases in strategic sectors.

The electronics and automotive industries rely heavily on Chinese components and have experienced higher production costs in Mexico, which reduces their competitiveness. Higher costs of imported inputs may trigger inflationary pressures on domestic consumption, as was the case with Import Substitution Industrialisation.

US and European protectionism against Chinese industry, with the argument of dumping as an unfair practice, has now moved on to Latin America. Trump started with these tariffs, and Biden raised them from 7.5% to 25%, which wiped out the steel trade. In April 2024, Mexico, Chile and Brazil announced new tariffs on imports of this product to protect local companies.

The Mexican government justified the measures to safeguard domestic industries, although the tariffs have side effects, as argued in the 1987 World Bank report. China's retaliation further disrupts existing trade flows and hurts industries. Tariffs can help generate employment if Mexican entrepreneurs will invest. Alternatively, they can hurt North American consumers by raising prices, limiting choice and reducing economic competition. Competition between the major powers puts Mexico in a leading role due to its geographical location and has become the battleground between them. Mexican business people should now react.