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Five ways that the US-China trade war could affect Mexico

Five ways that the US-China trade war could affect Mexico

President Donald Trump has instigated a US-China trade war for the purpose of “leveling the playing field” between the US and Asia’s largest economy.  A trade dispute between the world’s two largest economies will have global repercussions, as well as may affect Mexico.  Below are five ways in which the Mexican economy may be influenced.

1.  Lower growth – Economists estimate that a US-Mexico trade war will lead to lower growth in the United States of between one-half and one percent.  As a result of diminished growth in the US, Mexico may also be affected accordingly.  This is due to the fact that the Mexican economy is highly dependent upon that of the United States.  When the US economy contracts, in most cases, the same happens to Mexico.  Eighty percent of Mexico’s exports are consumed by the United States.  The country’s outlook will in all likelihood be linked to that of its northern neighbor.  This is despite Mexican efforts to diversify its markets.  An example of this move to expand its markets can be seen in Mexico’s participation in the Trans-Pacific Partnership trade accord.  It is predicted that Mexico’s GDP will grow at a pace of approximately 1.8% percent during 2019.  This contrasts with the 2.2% economic expansion registered during the previous calendar year.

2..More inflation – China has been called the “factory of the world.” It is the globe’s largest producer of hundreds of consumer goods including footwear, clothing, and household products.  It is very likely that the US-Mexico trade war will provoke an increase in the cost of goods that are manufactured in China.  In addition to in the United States, an increase in the cost of products originating in China will be felt by Mexico.  Mexico’s central bank, Banxico, predicts that cumulative inflation in the country will reach 4.4% for 2019.    In 2018, according to Mexico’s central bank, aggregate inflation was 2.44%.

3.  Disruption of supply chains – Trade between the United States and China is composed of a significant degree of intermediate goods. These items go to other countries to be used as inputs into their manufacturing industries.  These may include, for instance, fabric for clothing or electronic components for machines.  These products will be made more expenses because of tariffs that are imposed, and their supply will be complicated by uncertainty caused by the US-China trade war.  Recently, half of US companies with global supply chains have reported adverse effects on their business operations resulting from the US-Mexico commercial disagreement.  The trade war backlash has impacted more than just soy farmers and automotive manufacturers.  It has prompted businesses to adapt in ways that have disrupted global supply chains, as well as those in Mexico.  On a positive note, however, the US-China trade war and resulting punitive tariffs have motivated companies that are manufacturing in China to explore the prospects of manufacturing in Mexico for the purpose of duty avoidance.  An example of this trend is the Swedish company Dometic AB.  The company, that manufactures cooling systems and air conditioning systems for recreational vehicles and trucks, shifted Chinese production to a plant in Mexico in 2018 as a response to the US-China trade war.   Another company that has reacted negatively to the tensions created by the US-China trade war is Fuling Global Inc.  The Chinese firm has a production facility in the Lehigh Valley in Pennsylvania.  As a result of the trade tensions that exist between the world’s two largest economies, Fuling has decided to open its second North American facility in Monterrey, Mexico rather than expand its US operations.  Fuling Global Inc. is a manufacturer of paper and plastic tableware.

4.  More sales to the US – Because the US-China trade war will make Chinese goods more expensive in the United States, countries like Mexico, Japan, and Canada may be able to make sales of more than US $20 billion in additional exports to the world’s largest consumer country.

5.  A decrease in world trade and diversification of markets – Between 1929 and 1934 there was a global trade war that resulted in a 66% decrease in the volume of world trade. During this period, many of the world’s nations imposed tariffs and promoted protectionist policies in their economies.  Although it is anticipated that current trade tensions between the US and China will not become generalized, a higher degree of global protectionism may make it more difficult for Mexico to achieve the goal of diversifying the markets for its exports.

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