One unintended beneficiary of Donald Trump’s ill-advised and economically illogical trade war with China lies south of the border, down Mexico way:
When President Donald Trump made good on his promise to be “Tariff Man” this week, he sent economists into a lather, launched the stock markets on a wild and largely downward ride, and thrilled parts of his political base, who saw a president finally willing to use his bluntest policy weapon against America’s biggest economic rival. Trump claims that imposing as much as $60 billion in new taxes on Chinese goods will hurt China more than American consumers. Both are quite likely to be hurt, at least in the short run. But the tariffs have an unexpected beneficiary as well, one that Trump is surely less excited to talk about. In an ironic twist, Trump’s tariffs might make Mexico great again.
The easy, and wrongheaded, pro-tariff argument made by Trump and his fellow China hawks is that when he slaps a tax on goods from China, it will make it less attractive for companies to manufacture there and less appealing for American consumers to buy goods made in China. That will then create an incentive to make more in the United States. So, America wins, right?
But the reality is that America and China are both going to lose, and they aren’t haggling in a vacuum. There are dozens of players ready to swoop in to take advantage when two titans start wounding each other.
The entire network of production, with China as an assembly hub for parts sourced globally which are then put together in mainland China and shipped to the United States, has been the product of more than 20 years and trillions of dollars in investment. Changing that isn’t going to happen quickly. Companies can’t just snap their fingers and rejigger their supply chains overnight. The cost of abandoning it is many multiples greater than the amount of the tariffs, no matter who pays them.
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If Trump’s trade war against China does finally disrupt the U.S.-China economic fusion, the main beneficiary will not be American manufacturers. Instead, the winners will be other countries, including one very prominent country that borders the U.S. and that Trump has denounced for its unfair trade deals with the United States under NAFTA.
Already, Hasbro and GoPro have shifted production from China to Mexico, along with hundreds of other companies totaling tens of billions of dollars. Other countries that are seeing new investment include Indonesia and Egypt.
Mexico in particular stands to gain because it is easier and cheaper for U.S. companies to relocate manufacturing there than to build new factories elsewhere for the kind of goods now produced in China. Mexico has the infrastructure from years of NAFTA, as well as ease of transport to and from the United States. That isn’t necessarily bad for the United States, but then again, it wasn’t necessarily bad that manufacturing that was no longer economically feasible in the United States went to Japan and Taiwan in the 1970s and 1980s, and then to China in the late 1990s and into the 2000s. And it certainly isn’t what the political proponents of tariffs, both Democrat and Republican, promise will happen.
Faced with such facts, Trump may well be inclined to impose tariffs on everyone, everywhere in the hopes that enough economic walls will force a complete rejiggering of the global economic system and lead to a return of a 1950s halcyon moment when, after the global destruction caused by World War II, U.S. manufacturing accounted for nearly half of all world production. To accomplish even a fraction of that, the U.S. would have to impose tariffs far higher than 25 percent. Tariffs would have to be so high that companies simply could not manage the costs of producing abroad. Only then would it be economically sensible to produce lower-cost goods domestically—at much higher cost than most other countries.
Trump the Tariff Man would need tariffs of more like 100 percent to make that attractive to companies. He probably would support that. Of course, tariffs in excess of 100 percent would wreak havoc on our economy, and would then require, oh, many trillions of dollars of domestic spending to stave off the decimation, help companies build new supply chains and provide a cushion for citizens facing a doubling of the cost of living. One could, in theory, craft a rational argument for just that, for a government-triggered economic revolution, but you’d be hard pressed to find anyone making that case, and very few would ever support it.
There are actually two important points here that need to be noted in response to the arguments that Trump and his supporters make in favor of Trump’s trade war. Both of them are tied together in some respects, but they are also quite separate and they show in turn why increased tariffs on goods made in China, or elsewhere, isn’t necessarily going to lead to a renaissance in American manufacturing and why these tariffs are going to end up hurting American businesses and consumers in the long run.
The first point is that even with the increased tariffs on goods made in China the odds that many of the American and other manufacturers who have built factories in that country to make their goods and ship them to places like the U.S.will suddenly decide to close up shop and move back to the United States. One reason for that is the fact, as noted, that moving factories to China cost companies millions and billions of dollars in investment and training. Walking away from that investment simply isn’t a feasible option in many of those cases. Additionally, it’s likely that in many cases the additional costs imposed by the tariffs still don’t make up for the savings that these companies enjoy from the lower costs for labor and other manufacturing inputs. Additionally, as the article above notes, the process that has resulted in China becoming a manufacturing hub is the result of decades of policy choices by businesses and investors. It’s not a decision that’s likely to be reversed on a whim because of Trump’s quixotic trade war.
The second point is that even if the increased tariffs make the cost of doing business in China more expensive to the point where moving production is being contemplated, the United States is not likely to be the immediate beneficiary of this phenomenon. Instead, manufacturers will look to other parts of the world where labor costs are comparable to China’s, or even cheaper, In some repects this is a process that had already started, with nations such as Vietnam, Indonesia, and Malaysia increasingly becoming attractive locations to do business even before the tariffs on Chinese-made goods started to rise. To the extent that the tariffs make it worthwhile for businesses to reconsider locating manufacturing in China, it’s more likely that they will seek to relocate to a country with labor and other costs similar to those in China rather than building in the United States.
In addition to the nations in the Pacific mentioned above, one of the nations most likely to benefit from those developments is Mexico. Like many of those nations, Mexico has lower labor costs and a population eagerly looking for work. In addition to that, though, moving to Mexico means reaping the benefits of the trade agreement between the United States, Mexico, and Canada. To some extent, this has already been happening thanks to the existence of NAFTA, but there’s a very good chance that we’ll see it increase in pace thanks to the preferential treatment that goods manufactured in Mexico would receive under the new U.S.-Mexico-Canada Agreement, which may as well be called NAFTA 2.0. Under that agreement, goods made in Mexico will get preferential treatment that, combined with the lower labor and other costs, is likely to make basing production south of the border even more economically sensible.
Whichever way you look at it, though, what’s clear is that the President’s trade policies are not going to make America great again.
