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ITIF: Why Trump’s Approach to Trade with Mexico and China is All Wrong

Trade is all the rage right now with its name either being dragged through the mud or reinstated to its rightful glory, depending on your perspective.

Either way, it’s true that U.S. President Donald Trump has stirred up some controversy regarding global trade relations in general, and more specifically, with China and Mexico.

And though he’s taking a similar approach with regard to import taxes on both nations, throwing out exorbitant potential taxes on their goods going into the U.S., the trade relationship between the U.S. and Mexico and the U.S. and China could not be more different.

That’s according to a recent Information Technology & Innovation Foundation post looking at the two U.S. trading partners and mulling what Trump’s policies could do to change things.

“Mexico and China frequently are labeled as scapegoats for U.S. manufacturing decline,” ITIF wrote.

The two rank among the top trading partners for the country, with Mexico making up 15 percent of U.S. global trade volume and China, 17 percent, according to ITIF. That has been the reason those opposed to trade as it currently is point to as the cause of the U.S. jobs exodus.

“However, losing a job to China is much more damaging for the United States than losing a job to Mexico for three main reasons: The United States and Mexico have conjoined and complementary supply chains in many industries; Mexico generally plays by the rules while China willfully ignores international trade agreements; and trade with Mexico does not aggressively grow the U.S. trade deficit,” according to ITIF.

Integrated supply chains between the U.S. and Mexico mean success is shared

Thanks to NAFTA, supply chains often cross the U.S.-Mexican border, and the partnership between the two countries means things like complementary labor forces, investments and innovation capacity are brought together to improve global competition.

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“With strategic relationships with Mexico, the United States can keep the higher value-added components of industries befitting our comparative advantage as a high-wage, innovation-intensive country,” according to ITIF.

What’s more, 40 percent of the inputs for finished manufactured goods in Mexico come from the U.S. For China, on the other hand, that number is a considerably lower 4 percent.

“Unlike trade with Mexico, when production goes to China, the United States loses out on much more of the production process,” ITIF said, adding, “When imports from Mexico go up, so do U.S. exports.”

Mexico generally follows the rules, China does not

China has been known for its international trade infractions and the U.S. has filed countless cases against it with the World Trade Organization. Mexico, the ITIF argues, has for the most part followed the rules.

“Mexico and the United States typifies a bilateral free trade relationship,” ITIF said. “Conversely, the U.S. relationship with China is unilateral—the United States observes free trade rules yet suffers from aggressive, predatory digressions from fair trade practices from the Chinese.”

MIT economics professor David Autor has found in his research that the effects of Chinese imports to the U.S. led to the loss of 2.4 million manufacturing jobs between 2000 and 2010, roughly 42 percent of all the jobs lost at that time.

As a result of issues like currency manipulation, intellectual property theft and localized barriers to trade, ITIF ranks China second to last on its index addressing countries’ quality of policies related to free trade. Mexico also scores below average on the measure but comparing it to countries at similar development levels, the ITIF said it “does quite well,” and that its transgressions are “less egregious.”

Trade with Mexico doesn’t contribute to the U.S. trade deficit

The U.S. runs a trade deficit with both Mexico and China, but the deficit with Mexico is a considerably smaller fraction and hasn’t grown much despite a swell in U.S.-Mexico trade. The widening trade deficit in 2015 likely had a lot to do with the dollar’s rising value, according to ITIF.

“The United States deficit with Mexico is well within the parameters of what is expected, and until 2015, the United States ran an overall surplus with its NAFTA partners,” ITIF said. “In contrast, Chinese exports to the United States almost match those of Canada and Mexico put together, while it imports less than 50 percent of the U.S.-made goods that the United States’ NAFTA partners do.”

What’s the better way forward for China and Mexico trade relations?

“Mexico and China should not be grouped together in the debate over manufacturing, globalization and protectionism,” ITIF said. If a U.S. firm moves to China or competition from a Chinese company puts it out of business, there’s little for the U.S. to gain but a lot for it to lose. With the U.S. and Mexico, however, a more mutually beneficial trade relationship means any economic activity lost is often made up for in other areas of the manufacturing sector. When a U.S. job gets lost to Mexico, it’s usually a result of market forces, but when one is lost to China, it could be owed to calculated moves by the Chinese government, according to ITIF.

In short, ITIF noted, “The Trump administration needs to choose its battles carefully. Engaging in a ‘skirmish’ with Mexico will mean not enough resources to engage in a ‘war’ with China.”