Why is China worried about Trump's tariffs in Mexico?

Beijing officials are increasingly worried that President Trump's tariffs in Mexico could be the launch of a wide range of campaigns that force developing countries around the world to choose to trade with the United States.

Since Trump imposed extensive tariffs on goods from China during his first term, businesses have invested heavily in countries such as Mexico, Vietnam and Thailand to assemble Chinese elements into products that are shipped to the US. Final meetings in these countries provided a backdoor to the US market regardless of trade friction between Washington and Beijing.

China's trade surplus with the US has shrunk by almost a third since 2018. However, China's exports to developing countries are rising rapidly. China is currently selling 11 times more to Mexico as China buys from it. These sales include Chinese auto parts assembled in Mexico with cars directed at US dealers.

The current concern in Beijing is that Washington pressure could force Mexico to close the market to Chinese goods in exchange for a grace period from US tariffs on trade with Mexico. What is at stake for Mexico is, among other things, the work created by abundant trade with the United States.

Trump has since been able to use Mexico as a model to demand other countries on the side of the trade war between the United States and China. This further limits access to China's huge American market by disrupting other routes to the US.

As Trump renegotiated a North American free trade deal during his first term, Chinese businessmen and officials were hoping to start his second term by threatening Mexico's steep tariffs. Some unique features of China's trade and legal arrangements with Mexico mean that China's indirect access to the US market is particularly at risk during the ongoing conflict between Trump and Mexico.

A particular concern for Chinese officials is the ambiguous loophole that was burned into the rules of the World Trade Organization when the Geneva-based organization was created in 1995. This loophole causes Mexico and dozens of low- and middle-income countries to infiltrate and suddenly penetrate Chinese goods;

Chinese officials hinted that they were nervous about maintaining access to developing markets during the weekly annual session of China's Parliament that ended Tuesday. Commerce Minister Wang Wentao said at a press conference that it was just over half of China's international trade and was an outreach to countries belonging to the Belt and Road Initiative, China's wealthy countries in Asia, Eastern Europe, Africa and Latin America.

“We didn't put all of our eggs in one basket. This shows the strong resilience of China's foreign trade,” Wang said without mentioning that many of China's exports to these countries will ultimately end in the US.

He took note to point out that 34% of China's trade is in countries with free trade agreements. These agreements are important, primarily because contracts with Southeast Asian countries bind signatories to prevent sudden tariff increases.

Wang sought more such contracts with “ambitious countries and regions.”

Mexico is not one of the 27 countries that have signed a free trade agreement with China, so the Mexican government can raise tariffs on Chinese goods.

Mexico was also one of dozens of developing countries that were members of general agreements on tariffs and trade, and prior to the creation of these countries that preceded the creation of the WTO, there was little binding commitment to reaching special deals in the establishment of the WTO and reducing tariffs. Instead, they were encouraged to gradually lower the tariffs voluntarily.

According to the WTO, Mexico has lowered its average tariff to 7%, but Mexico's average “binding” tariffs (simply sending a notification to the WTO could immediately begin a billing session, at 36%.

If Mexico raises tariffs in China, many other countries with the same WTO deal could face pressure on us to not become a conduit for Chinese products. For example, Brazil applies an average tariff of 11%, but its binding tariff is 31%.

The WTO provides for a prohibiting country from raising tariffs on a single country. Trump ignores the rules, but most other countries, including Mexico, China and members of the European Union, try to avoid doing so unless other countries launch a trade war.

However, the WTO allows the country to raise tariffs on the highest bound ceiling, provided that the country applies to all imports of its target products from around the world. China exports almost all of its global supply with many categories of manufacture. This allows developing countries to raise tariffs applied in these categories and attack almost exclusively from China.

China's hope is for other large trading countries to reject China and the US' choice.

“I don't think that close trade partners with China would choose people who have highly binding tariffs in the WTO, especially those who have free trade agreements with China,” said Tu Xinquan, dean of the China WTO Institute at Beijing's Faculty of International Economics. Mao Zedong established the university in 1951, training and advised Chinese trade negotiators.

Unlike Canadian leaders and the European Union, Mexican President Claudia Sheinbaum said that despite her government's focus on the issue, it is rarely public during the recent trade dispute. Mexico's Chinese ambassador, Jessu Seed, helped create the WTO in the early 1990s and played a central role in renegotiating President Trump and Mexico's NAFTA in 2018.

China is fortunate in Vietnam, the largest partner in indirect exports to the US, did not participate in the WTO until 2007, so Vietnam is trading under rules that are different from Mexico. Trade institutions have required them to accept low ceilings of bound tariffs since 1995.

Vietnam applies an average tariff of 9%, with the average binding tariff that can be applied to a maximum of 12%. Developed countries like Canada also have vulgar tariffs that limit the ability to charge more items from China.

China's economy is heavily dependent on a massive, constantly wide trade surplus that reached nearly $1 trillion last year. Almost all of China's exports are manufactured goods, and the surplus of these goods amounted to about a tenth of the total economy last year.

That's at a level the US did not achieve even after World War II, when American industries quickly returned to private production and strengthened exports as much as many others in the world fell into abandonment.

China is reliant on rising exports to limit the economy's ability to grow in other ways due to housing market conflicts that have made Chinese households reluctant to spend and limit the economy's ability to grow in other ways.

Another vulnerability is that much of China's trade surplus lies in developing countries. These countries rely on operating a trade surplus with the US to pay for goods imported from China, causing Trump's rage.