Mexico has benefited from the US-China trade war — but Trump could change that

Mexico has been one of the beneficiaries in the ongoing U.S.-China trade war, but American President Donald Trump’s recent threats to impose a new tariff on the country could change its fortune, said the chief economist of the World Trade Organization.

Tensions between the U.S. and China have resulted in the two countries importing fewer goods from each other, especially products subjected to increased tariffs, Nomura said in a report this week. As a result, importers in the U.S. and China have been sourcing for those goods from countries such as Mexico and Vietnam, said the Japanese bank.

But the benefits to the Mexican economy will be weighed down if Trump carries out his threat to slap additional tariffs on all American imports from Mexico, Robert Koopman, the chief economist at the World trade Organization, said on Thursday.

“We’re seeing a fair amount of what we call trade diversion, where economic activity is moving away from … the parties that are in conflict: The U.S. and China,” Koopman told CNBC’s Nancy Hungerford at the Institute of International Finance’s spring meeting in Japan.

Trump said last week he will impose a 5% tariff on all American imports from Mexico starting June 10. The tariffs will progressively increase to 25% by Oct. 1, unless Mexico takes action to reduce or eliminate the number of illegal immigrants crossing into the U.S.

Goldman Sachs President and Chief Operating Officer John Waldron told Hungerford earlier Thursday that “for sure, Mexico has to worry” about Trump’s threatened tariff because the country does “an enormous amount of trade” with the U.S.

The United States imported $346.5 billion of goods from Mexico in 2018, up 10.3% from the year prior, according to the USTR.

Waldron said that the threatened tariffs on Mexico have added “more fuel to the fire in the overall trade situation” facing the global economy — a sentiment shared by many economists, with some saying it may even derail any potential deal between the U.S. and China.

“Trump’s tariff threats to Mexico are going to make it more difficult to reach a trade deal with China, as they damage the credibility of the US as a negotiating partner,” Simon Baptist, chief economist at consultancy The Economist Intelligence Unit, told CNBC in an email last week.

He explained that China may now “see even less point in trying to reach a deal, and will certainly be less willing to make meaningful concessions as it is hard to see a credible mechanism to bind Trump to any deal.”

Bringing back US jobs

Economists are also questioning if Trump could achieve his objectives by slapping tariffs on other countries. The president had said tariffs on Mexico could help bring back jobs to the U.S. in addition to forcing the Mexican government to address his concerns about immigration.

Koopman said that some manufacturing activity may indeed move back to the U.S., but that would come at a cost.

“There may be quality issues, particularly, there may be an adjustment time to bring back all the capabilities to the United States. In the end, what would happen is: The U.S. will be able to produce, it’s a very capable economy, it’s near the leading edge of global technology, but it would be at much higher costs and fewer choices for consumers,” he explained.

And the U.S. wouldn’t be the only location that manufacturers will consider moving to in order to avoid tariffs, said Rajiv Biswas, chief economist for Asia-Pacific at consultancy IHS Markit.

Biswas told CNBC in an email that “competitive” Southeast Asian economies such as Vietnam, Thailand and Malaysia would also be in the running to attract manufacturers that choose to move out of Mexico as a result of Trump’s tariffs.

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