Trade wars also have winners: Vietnam and Mexico

All wars have their winners, and that certainly includes trade wars. Since January 2018, when then U.S. president Donald Trump first raised tariffs on solar cells and modules and washing machines from China, countries like Vietnam and Mexico have seen exports grow, expanding into the evermore distant space between Washington D.C., Brussels and Beijing.

Vietnam is the best-known and most obvious example. The United States receives one-third of its exports, and China is the origin point of the majority of its raw materials. According to a Bloomberg analysis, as early as 2019, the country took over half of the exports that were displaced from China to other Asian countries due to tariffs.

With direct foreign investment having increased by nearly 33% in 2023, Vietnam is now home to Chinese companies Foxcann and Luxshare; Taiwan’s Pegatron; South Korea’s Samsung; and U.S. companies Dell, HP, Microsoft and Google (who operate laptop, game console and phone factories). Vietnam’s growing importance has much to do with its ability to maintain good relationships with both China and the U.S., its many free trade agreements and its infrastructure investments that have allowed factories to be located just a 12-hour drive from Chinese suppliers in Shenzen.

Still, the future will bring Vietnam new challenges. Although the country tightened its relationship with the United States in September — elevating it to a “comprehensive strategic partnership” — both Washington D.C. and the EU still think Vietnam is not a market economy, with the trade barriers that this implies. The low rating of its workforce and deficient electrical network are other issues that may impact the country’s bid to develop its semiconductor, artificial intelligence and renewable energy sectors.

Vietnam has not benefited from Chinese tariff hikes just because it makes similar products and its geographic closeness to the Asian country. According to a study led by UCLA economist Pablo Fajgelbaum, a key factor in understanding which countries are winning the trade wars lies in the concept of “tariff elasticity.”

“Some countries have been able to penetrate the U.S. faster than others because they were better situated to reorient their commercial activities due to more flexible labor markets or previous trade agreements,” Fajgelbaum tells EL PAÍS via email. “The wining countries were those able to respond swiftly to tariffs and reorient their trade and production, which did not always align with those specializing in the sectors subject to tariffs.”

Another finding from the study, which was published in June by American Economic Review Insights, is that in the wake of the Chinese tariffs, these “winning countries” did not just increase exports to the United States — they also increased their sales to the rest of the world. Economists Daniel Chiquiar, from the Autonomous Technological Institute of Mexico (ITAM), and Martín Tobal, from the Bank of Mexico, arrived at a similar conclusion about Mexico in a study that suggests that taking advantage of the economies of scale improves international competitiveness.

Mexico was well situated to benefit from the tariff wars thanks to its USMCA free trade agreement with Canada and the United States. That was the understanding of Chinese companies, which in 2022 alone increased their investments in Mexico by nearly 50% to arrive at a total of $2.5 billion. Chinese manufacturing firms like Lingong and TDI and electric vehicle manufacturers like BYD have shown interest in Mexico. The trade balance tells a similar story: Mexico overtook China in 2023 to become the leading exporter of goods to the United States that year, with China’s exports to Mexico growing at an even faster rate.

The most obvious risk of China’s growing commitment to Mexico is that the United States will grow impatient. Its trade deficit with Mexico increased by 17% in 2023 to $152 billion. The agency in charge of U.S. trade policy has already scolded its southern neighbor for its lack of transparency regarding Chinese steel and aluminum imports, but the truth is that the USMCA has loopholes that allow for the integration of components from other countries into products that are later sold as Mexican. There’s even more risk ahead in 2026, when Mexico, Canada and the United States will reconvene to decide whether or not to extend the current agreement until 2042.

Although some exports have increased, the price hike that the tariff war has provoked in the United States has affected Canada and Mexico more than other countries. Such is the conclusion of a paper by the economist Holger Görg from Germany’s Kiel University, whose explanation seems intuitive: those who stand the most to lose from the rising price of U.S. products are also the country’s principal trade partners.

Published in 2018, Görg’s study was carried out using the production structure at that time, and clearly could not have considered the reorganization of supply chains that has taken place since. Even so, he points out, “it is very clear, and this has been confirmed by other studies since, that prices are much higher than they would have been without the trade war,” he told EL PAÍS in an interview that took place via video call.

The Irish example

The list of third-party countries benefiting from Chinese tariffs is not limited to Mexico and Vietnam. In Europe, there’s the case of Ireland, which in the last five years has tripled its bilateral trade with China, attracting the interest of corporations like WuXi Biologics, Huawei and ByteDance, which owns TikTok. Then there’s Hungary, which, according to a report by the German study group Merics, received 44% of China’s direct European investments in 2023. Poland, the world’s second-largest producer of batteries (after China), has seen Chinese imports grow 112% since 2017, according to Financial Times.

As Ian Bremmer, founder of the consulting firm Eurasia Group, said in an interview with EL PAÍS: “China was always going to find mechanisms to get around U.S. trade barriers, just as Japan did in the 1980s.” The Biden administration, he explains, is limited in its ability to react by its “unwillingness to raise tariffs on partners and allies.” In his estimation, a Kamala Harris administration would inherit that approach and would only use tariffs on an ad hoc basis to shore up U.S. green industry policy or to address potential overcapacity in China.

According to Bremmer, “Trump does not share any of the hesitations of Biden and Harris” and would threaten countries like Mexico and Vietnam with tariffs to renegotiate regulations surrounding points of origin and to limit the amount of Chinese products used to make goods exported from those countries to the United States.

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