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Should Mexico’s new tariffs sound early warning alarms for China’s exports?

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New tariffs from Mexico could be an ill omen for Chinese exporters as global supply chains shift, with the Latin American country looking to balance its economic interests against pressures from the US over its relationship with the Asian manufacturing powerhouse, analysts said.

Tariff hikes, levying 5 to 50 per cent in additional import costs, have kicked in for 544 products entering Mexico. The higher rates only apply to countries without free trade pacts with the Latin American country, which includes China – its second-largest trading partner and a growing source of shipments over the last two years.

“[The tariffs are] to provide certainty and fair market conditions to domestic industrial sectors that face vulnerability derived from practices that altered and affected international trade,” read a Mexican government statement from April 20 regarding the change.

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Affected products include steel, aluminium, textiles, clothing, musical instruments and furniture.

The tariffs present a new hurdle for Chinese businesses as they search for new export destinations, with traditional supply chains altered after escalations in economic tensions with the US.

Mexico has been seen as a “springboard” for Chinese products to enter the American market since the beginning of the China-US trade war in 2018. The Latin American country has also become a prime destination for the US’ “nearshoring” policy, intended to relocate supply chains to neighbouring states.

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Annual growth in container shipping between China and Mexico increased by 34.8 per cent in 2023 compared to a 3.5 per cent jump in 2022, according to shipping data platform Xeneta. At the same time, Mexico has overtaken China as the US’ biggest trading partner.

While the Mexican government said the new tariffs were intended to “balance changes in the market to avoid economic distortions” to its domestic industries, geopolitical and trade experts named pressure from Washington as another factor.

Deborah Elms, head of trade policy at Hinrich Foundation, said there is growing concern in Washington that the growth in Mexico includes “Chinese goods that are not undergoing any manufacturing in Mexico, but only circumventing trade rules and tariffs”.

To help stop growing trade flows and – probably – demonstrate resolve to Washington, Mexico has started applying tariffs

Deborah Elms

“To help stop growing trade flows and – probably – demonstrate resolve to Washington, Mexico has started applying tariffs,” Elms said.

Liu Xuedong, professor in economics and engineering at the National Autonomous University of Mexico, also sees Mexico’s move as a result of prodding from Washington, as lawmakers from both US parties put forward a proposal in March to reimpose a 25 per cent per cent tariff on Mexican steel amid concerns from US trade groups about a surge in imports.

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Chinese steel exports to Latin America reached a record high in 2023 according to industry association Alacero, while steel production in the region fell almost 4 per cent year on year.

Mexico’s Ministry of Economy announced a provisional compensatory duty of 31 per cent on Chinese steel nail producers in March at the conclusion of an anti-dumping investigation that started the previous September.

“In the long run, I don’t think the Mexican authorities would continue to increase the tariff rates,” Liu said, adding Chinese companies that have already moved to Mexico would be minimally impacted. Most of the companies in question, he said, are not involved in steel or aluminium and would otherwise be exempted from tariffs.

These tariffs aim to protect domestic industry from the tsunami of Chinese imports. My guess is they will be revised upwards

Jorge Guajardo

However, Jorge Guajardo – Mexican ambassador to China from 2007 to 2013 – said he thinks China could expect more tariffs from Mexico and other developing countries, as politicians look to appease domestic players who have grappled with increased competition.

“These tariffs aim to protect domestic industry from the tsunami of Chinese imports. My guess is they will be revised upwards in the future,” said Guajardo, now a partner at Dentons Global Advisors in Washington.

Last August, Mexico applied tariffs to 392 items, covering nearly 90 per cent of Chinese exports. Although four were removed from the list in April’s round of increases, another 156 were added, with a majority having their percentages raised. Footwear and toilet bowls, for instance, will now face a 35 per cent tariff when imported to Mexico.

These import duties will not apply to goods originating from countries with an existing free trade agreement – most notably the US – and will not affect industrial production in certain sectors like auto parts.

Both Mexico and the United States have presidential elections this year – Mexico in June and the US in November – and the races are drawing attention to potentially drastic transformations of supply chains down the line.

Donald Trump, former US president and presumptive Republican candidate for this year’s contest, has said he would target cars made in Mexico by Chinese companies with a 100 per cent tariff.

Guajardo said there could be greater repercussions for trade between Mexico and China following the elections.

“My guess is all candidates will be in favour of erecting further tariffs against Chinese imports,” he said. “They all face an outcry from domestic manufacturers [over] unfair competition from depressed Chinese prices.”

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