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Mexico and China Are Very Different Trading Partners

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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With free trade under fire from the incoming administration and under question from many other quarters, it is U.S. 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.

The Top U.S. Trading Partners
U.S. trade in goods, 12 months ending October 2016
 
Source: U.S. Census Bureau

Although China and Mexico both trade a lot with the U.S., and have both been running significant trade surpluses with the U.S. for decades, that's where the similarity ends. The China-U.S. trade relationship is spectacularly unbalanced, with a gap between goods exports and imports that exploded not long after China joined the World Trade Organization 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.

The China Trade Gap
U.S. trade in goods with China, trailing 12 months
 
Source: U.S. Census Bureau

By contrast, the U.S. trade relationship with Mexico is a lot more, well, normal (I've rendered it on the same scale as the China chart so they're easier to compare). 

The Mexico Trade Gap
U.S. trade in goods with Mexico, trailing 12 months
 
Source: U.S. Census Bureau

Yes, Mexico has been running a trade surplus with the U.S. since a few months after the North American Free Trade Agreement went into effect in January 1994. But since the late 1990s, growth in U.S. exports to Mexico has kept pace with the growth in imports from Mexico. In fact, the current U.S. 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 percent of the value of U.S. goods imports from Mexico was made up of goods originally exported from the U.S. to Mexico, four economists (three of them then employed at the U.S. International Trade Commission) found in 2010. The equivalent figure for imports from China was just 4.2 percent. In a 2014 report for the Peterson Institute for International Economics, Georgetown University's Theodore Moran and Lindsay Oldenski found that a 10 percent increase in employment at the Mexican subsidiaries of U.S. corporations led to a 1.3 percent increase in employment and 4.1 percent 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 percent and the U.S.'s by 0.08 percent, while reducing Canada's by 0.06 percent.

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 U.S. to Mexico over the past couple of decades as corporations have tried to cut labor costs. This has clearly benefited those corporations, and in some cases hurt U.S. workers. Mainly, though, it has contributed to the growth of a regional manufacturing platform that is good to have in the neighborhood. This is from a recent study by Christopher Wilson, deputy director of the Mexico Institute at the Wilson Center in Washington:

The United States and Mexico do not simply sell finished products to one another, but rather produce them together. Supply chains criss-cross the U.S.-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 U.S. 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 U.S. has been mainly that of a seller and a lender. And the sheer scale of that selling and lending has been quite disruptive to U.S. 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 this month -- this time with co-authors Pian Shu and Gary Pisano -- showing declines in profitability, R&D spending and innovation (as measured by patent issuance) at U.S. corporations faced with new competition from China. The U.S. 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 U.S.-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 U.S. real estate bubble. It has clearly played a role in the political upheavals of 2016. What other mischief does it hold in store?

  1. I use goods trade data in this article because it's the timeliest and, in the case of China and Mexico, the most relevant. Adding in services reduces the U.S. trade gap with most countries, but not by enough to markedly change any of the charts or conclusions in this column.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Stacey Shick at sshick@bloomberg.net