The U.S. would likely need to exert heavy pressure on other countries in order for them to place large tariffs on goods coming from China, analysts from Capital Economics have argued.
Recent media reports have suggested that Beijing is becoming more worried that recent threats from U.S. President Donald Trump to slap tariffs on goods incoming from Mexico could be the start of a broader effort to convince developing nations to ratchet down their trade relationship with China.
Since Trump placed steep tariffs on Chinese items during his first term, many companies have spent on growing their presence in emerging economies like Mexico or Vietnam. The move allowed these firms to assemble Chinese parts in goods before they are sent to the U.S., thereby finding a path around Trump’s trade spat with China.
But officials in China are now reportedly becoming more worried that Washington could persuade Mexico to shutter its market to Chinese goods in exchange for relief from U.S. levies, the New York Times (NYSE:NYT) has reported. China’s indirect access to the U.S. could in theory take a hit from such an action.
One loophole that China is nervously eyeing is an obscure World Trade Organization rule which would allow Mexico to legally lift its tariffs sharply and swiftly on Chinese items, the New York Times said, adding that Beijing would likely have no right to respond.
Partly because Mexico was one of several dozen emerging countries that formed part of the General Agreement on Tariffs and Trade, a precursor to the WTO, it has the ability to raise its average so-called “bound” tariff to 36%, according to the NYT report.
“Countries with high bound rates typically haven’t applied them. In principle though, a country under pressure from the U.S. could lift its tariffs to the bound rates without violating WTO rules,” the Capital Economics analysts said in a note to clients.
Mexico, as well as Canada, may be most susceptible to this type of trade pressure from the U.S., they flagged. However, the analysts noted that Washington has much less leverage over countries, adding that roughly 40% of nations export more to China than to the U.S.
“That’s not to say that coercive pressure could not be effective,” the analysts said.
“But if it is relying on coercion alone, the U.S. would need to wield significant threats to have a chance of success, particularly in current circumstances when goodwill towards the U.S. among many traditional allies is running low.”
