The US shouldn’t train its trade guns on Mexico

With free trade under fire from the incoming administration and under question from many other quarters, it is US trade relations with China and Mexico that have been getting the most attention and criticism. That makes sense, given that those are two of this country’s three biggest trading partners — and the third is Canada, which is hard to get worked up about.

Although China and Mexico both trade a lot with the US, and have both been running significant trade surpluses with the US for decades, that’s where the similarity ends. The China-US trade relationship is spectacularly unbalanced, with a gap between goods exports and imports that exploded not long after China joined the World Trade Organisation in 2001 and that, while it has subsided a bit since last year, is still of a scale never seen before “Chimerica” came into being.

By contrast, the US trade relationship with Mexico is a lot more, well, normal. Yes, Mexico has been running a trade surplus with the US since a few months after the North American Free Trade Agreement went into effect in January 1994.

But since the late 1990s, growth in US exports to Mexico has kept pace with the growth in imports from Mexico. In fact, the current US trade deficit with Mexico is actually smaller, as a percentage of total trade volume, than it was in the mid-1980s.

This picture of a mostly stable, reciprocal, healthy economic relationship accords with the findings of multiple economic studies. About 40 per cent of the value of US goods imports from Mexico was made up of goods originally exported from the US to Mexico, four economists found in 2010. The equivalent figure for imports from China was just 4.2 per cent.

In a 2014 report for the Peterson Institute for International Economics, Georgetown University’s Theodore Moran and Lindsay Oldenski found that a 10 per cent increase in employment at the Mexican subsidiaries of US corporations led to a 1.3 per cent increase in employment and 4.1 per cent increase in research and development spending back home. And a 2012 paper by Lorenzo Caliendo of Yale University and Fernando Parro of Johns Hopkins University concluded that the tariff reductions in Nafta had increased Mexico’s overall economic welfare by 1.31 per cent and the US’s by 0.08 per cent, while reducing Canada’s by 0.06 per cent.

That last calculation was made using a “Ricardian model” with “sectoral linkages, trade in intermediate goods, and sectoral heterogeneity in production”. I wouldn’t put too much stock in the exact numbers!

But again, it fits with the overall picture. Manufacturing jobs have moved from the US to Mexico over the past couple of decades as corporations have tried to cut labour costs. This has clearly benefited those corporations, and in some cases hurt US workers.

Mainly, though, it has contributed to the growth of a regional manufacturing platform that is good to have in the neighbourhood. This is from a recent study by Christopher Wilson, deputy director of the Mexico Institute at the Wilson Center in Washington: “The US and Mexico do not simply sell finished products to one another, but rather produce them together. Supply chains criss-cross the US-Mexico border, such that parts and materials often cross the border multiple times during the course of production.”

It doesn’t work like that with the US and China. China is part of an East Asian regional manufacturing platform along with the likes of Japan, South Korea and Taiwan, but its economic relationship with the US has been mainly that of a seller and a lender. And the sheer scale of that selling and lending has been quite disruptive to US workers, corporations and financial markets.

The economists David Autor, David Dorn and Gordon H. Hanson, who have gotten a lot of attention with their recent studies of the impact of this “China shock” on workers, regional economies and even the 2016 election results, have a new paper out showing declines in profitability, R&D spending and innovation at US corporations faced with new competition from China.

The US has gotten a lot of good stuff out of this relationship with China: cheap Christmas ornaments, amazing smartphones, a ready market for Treasury bonds, you name it. But I don’t think it’s what you could call a stable, reciprocal, healthy economic relationship.

The US-China trade imbalance was a big factor in the global financial crisis of 2007 and 2008, as massive capital inflows from China helped inflate the US real estate bubble. It has clearly played a role in the political upheavals of 2016. What other mischief does it hold in store?

— Bloomberg