Take a rubber band and place it around your fingers and thumb. When you move your thumb, all the rest of the fingers feel the change and strain. That truism reflects all relationships, between nations and between individuals.
The thumb in this case represents the tariff rate increases instituted by President Trump. All our major trading partners are feeling the effects of the changes wrought by these tariff increases. By examining Mexico, Russia, and China we can see the rubber band effect playing out before our eyes. The source for this column comes from an August 16, 2018 “Geopolitical Futures” article entitled, “Diversifying Mexico’s Export Markets,” by Allison Fredirka.
Mexico’s close proximity to the world’s greatest economic power is both a blessing and a curse, according to Fredirka. There are a lot of rich consumers in the U.S. Roads and interactive trading systems have been created over the years. It’s what economists call comparative advantage. Costs are cheaper for Mexican products because of Mexico’s proximity to the U.S.
The problem for Mexico is that President Trump has pushed to renegotiate NAFTA, slapped tariffs on steel and aluminum, and pulled out of the Trans Pacific Partnership. These actions have put Mexico at a major bargaining disadvantage, since much of their exports go to the U.S.
Since 38 percent of Mexico’s income comes from trade, something needs to be done to compensate.
In reaction to its dependency on the U.S. market, Mexico has been reaching out for new markets for years, both to preserve its economy and to strengthen its bargaining position vis-à-vis the U.S.
Around 25 percent of Mexico’s export income comes from automobile manufacturing. Trump’s 25 percent tariff on vehicles puts a real dent in Mexico’s comparative advantage. Emerging markets for Mexican vehicles and parts hold the most promise: India, Russia, and China.
Selling more vehicles and auto parts to India, which has a 10 percent tariff on imports, for instance, only compensates for 20 percent of Mexico’s current U.S. market. India has its own auto manufacturing factories and doesn’t want to have their workers lose jobs to Mexican imports. India is more interested in using Mexico as a conduit for its auto sales to in America. India could use Mexican auto parts, though.
Russia and Mexico also look to increase trade, not in autos, but in parts. If Mexico can become a major supplier to Russia, that would relieve pressure on Mexico. Russia would also sidestep some of the sanctions placed on it by Europe and the U.S. and be less dependent on trade with the U.S.
China is the largest importer of finished vehicles in the world at 28.2 million units in 2017. The U.S. is the second highest importer at 17.2 million units, according to Fredirka. Since both China and Mexico have had tariffs slapped on them, increased cooperation between the two countries will benefit both. China is also considering building its first factory in Mexico in 2020. It has also moved to reduce restrictions on foreign businesses locating in China and increasing the percentage of foreign made parts to its vehicles to compensate for lost U.S. trade due to tariffs. These changes will help Mexico.
As you can see, Trump, representing the thumb in the rubber band simile, has caused all the other fingers to feel the stress and to make major adjustments to their habit patterns and trade. These changes can be good for these nations in the long run, but it will make all of them less dependent on the U.S. as a market. In spite of the recent U.S./Mexico trade agreement, the world will continue to become more diversified and interdependent.
Whether this will be a good thing in the long run for the United States remains to be determined. Trade and human relations are complex and often unpredictable.
You and I are affected by the same rubber band rule in our relations with others as the nations of the world are to Trump’s actions. The only difference is in the size and scope. In my experience, concern for the needs and desires of others is a far better approach than Trump’s wrecking ball tactics. The laws of human relations apply as much on the local level as it does on the international level. All politics are ultimately local.