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Dec 8, 2011 | 13:47 GMT

4 mins read

Portfolio: Mexico to Lower Tariffs on Chinese Goods

Analyst Karen Hooper examines Mexico's intent to drop tariffs on hundreds of Chinese goods Dec. 11 under the auspices of the World Trade Organization — a move that will likely lead to job loss and international friction. VIDEO TRANSCRIPT: Mexico will lower tariffs on over 200 Chinese goods Dec. 11 on the 10th anniversary of China's accession to the World Trade Organization (WTO). This is a move that may exacerbate underemployment in Mexico, encourage the entry of cheap goods into Mexico's domestic market and almost certainly create tension between Mexico and China within the framework of the WTO. When China joined the WTO in 2001, it signed a bilateral deal with Mexico delaying lowering tariff barriers to trade between the two countries. Current tariffs on Chinese goods range between 50 percent and 250 percent, but will be lowered to between 20 percent and 35 percent tariff when the transitional measures expire. Though there have been ten years to prepare for this moment, Mexican businessmen have been quite vocal in recent months about their objections to the change. Textiles, shoes and toys comprise four-fifths of the products that will be affected by falling tariffs. Understandably, companies that produce these goods are concerned about the impact of an influx of cheap Chinese products that could potentially displace Mexican-made products on the Mexican domestic market. Mexico's textile industry has grown the fastest over the past decade, reaching nearly 8 percent in 2010. While nearly 70 percent of those textiles are exported to external markets — and in particular the United States — there is a significant market at home in Mexico's trillion dollar economy. Mexican textile producers are concerned that the industry is vulnerable to Chinese products, which are essentially subsidized by China's financial structure. In the shoe manufacturing industry, which employs nearly half a million people, the industry expects Chinese competition to trigger the loss of around 35,000 jobs. As this is a trend that we expect to be felt across all affected industries, job losses could be significant in the aggregate. With presidential elections approaching in July, economic challenges will come in a close second to security concerns in Mexico. The global economic downturn of 2009 significantly destabilized labor markets in both the United States and in Mexico. Official unemployment rates in Mexico have risen from under 4 percent to around 5 percent in the past two years. However, these rates do not fully capture Mexico's underemployed labor pool. Underemployment in the United States has risen, as well, and there has been a sharp decline over the past several years in illegal immigration to the United States from Mexico. This has been highlighted by the fact that arrests at the border in Mexico are at their lowest in about 40 years. Likely this means that many Mexicans who would otherwise have gone to the United States for work are staying in Mexico. Mexico's relationship with China has become increasingly important over the past decade. Imports from China have spiked from about two to 15 percent of the total Mexican imports from the world, and Mexico is not alone in Latin America. In fact, Mexico is joining a small club of Latin American states with significant manufacturing sectors under threat from Chinese competition. Both Brazil and Argentina have, in the past several years, voiced serious concerns about Chinese competition and the possible hollowing out of their own manufacturing sectors. Brazil, in particular has emphasized its concerns about China's decision to keep the value of the yuan tied to the U.S. dollar, and in November the WTO agreed to arbitrate on the case. As Mexican tariffs drop, we can expect to see similar tension between Mexico and China. Mutual interest in protecting domestic manufacturing will likely create a common ground for Mexico and Brazil, in particular, to cooperate together to pressure China in what has become a global dispute over the Chinese yuan and Chinese products.

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