Officials in Beijing are increasingly worried that President Trump’s tariffs on Mexico may be the start of a broad campaign to force developing countries around the world to choose between trade with the United States or with China.
Ever since Mr. Trump imposed extensive tariffs on goods from China during his first term, companies have been investing heavily in countries like Mexico, Vietnam and Thailand to assemble Chinese components into goods for shipment to the United States. Doing final assembly in these countries offered a back door to the U.S. market regardless of trade frictions between Washington and Beijing.
China’s trade surplus with the United States has shrunk by almost a third since 2018. But Chinese exports to developing countries have skyrocketed. China now sells 11 times as much to Mexico as China buys from it. Those sales include Chinese auto parts assembled in Mexico in cars destined for dealerships in the United States.
The concern now in Beijing is that Washington’s pressure could force Mexico to close its market to Chinese goods in exchange for a reprieve from American tariffs on trade with Mexico. At stake for Mexico, among other things, are the jobs created by its abundant trade with the United States.
Mr. Trump could then use Mexico as a model to demand other countries take sides in the trade war between the United States and China. That would further limit Chinese access to the huge American market by disrupting other routes to the United States.
Because Mr. Trump renegotiated the North American Free Trade Agreement during his first term, very few businesspeople or officials in China expected him to start his second term by threatening steep tariffs on Mexico. Several unique characteristics of the trade and legal arrangements that China has with Mexico mean that China’s indirect access to the American market is particularly at risk during the ongoing confrontation between Mr. Trump and Mexico.
Especially worrisome for Chinese officials is an obscure loophole that was baked into the World Trade Organization’s rules when the Geneva-based organization was created in 1995. The loophole allows Mexico — and potentially dozens of low-income and middle-income countries — to legally raise tariffs steeply and suddenly on Chinese goods, while Beijing would have no right to retaliate.
Chinese officials alluded to their nervousness about maintaining access to developing markets during the weeklong annual session of China’s legislature, which ended on Tuesday. Wang Wentao, the commerce minister, noted at a news conference that slightly more than half of China’s international trade was with countries belonging to the Belt and Road Initiative, China’s outreach to less affluent countries across Asia, Eastern Europe, Africa and Latin America.
“We did not put all our eggs in one basket, which shows the strong resilience of China’s foreign trade,” Mr. Wang said, without mentioning that many of China’s exports to these countries eventually end up in the United States.
He took care to point out that 34 percent of China’s trade was with countries with which it has free trade agreements. That is significant because these agreements, mainly with countries in Southeast Asia, bind signatories not to raise tariffs suddenly.
Mr. Wang called for more such agreements with “willing countries and regions.”
Mexico is not one of the 27 countries that has signed a free-trade agreement with China, so the Mexican government can raise tariffs on Chinese goods.
Mexico is also one of several dozen developing countries that were members of the General Agreement on Tariffs and Trade, which preceded the creation of the W.T.O. These countries reached a special deal at the founding of the W.T.O., making very few binding commitments to reduce their tariffs. They were instead encouraged to gradually lower tariffs voluntarily.
Mexico has reduced its average tariff to 7 percent, according to the W.T.O. But Mexico’s average “bound” tariff — which it could start charging immediately by simply sending a notification to the W.T.O. — is 36 percent.
If Mexico were to raise its tariffs on China, many other countries with the same W.T.O. deal could face U.S. pressure not to become conduits for Chinese goods. Brazil, for example, applies tariffs of 11 percent on average, but its bound tariff is 31 percent.
W.T.O. rules bar countries from raising tariffs against a single country. While Mr. Trump has ignored the rules, most other countries, including Mexico, China and the members of the European Union, try to avoid doing so except when another country starts a trade war.
But the W.T.O. does allow countries to raise tariffs to their highest bound ceilings provided that the increase applies to all imports of the targeted product from around the world. China exports almost all of the world’s supply in many categories of manufactured goods. That makes it possible for developing countries to raise their applied tariffs in these categories and hit almost exclusively goods from China.
China’s hope is that other large trading nations will refuse to choose between China and the United States.
“I don’t think those close trading partners with China will pick a side, especially those with free trade agreements with China, even if they have high binding tariffs at the W.T.O.,” said Tu Xinquan, the dean of the China Institute for W.T.O. Studies at the University of International Business and Economics in Beijing. Mao founded the university in 1951 to train and advise China’s trade negotiators.
Unlike leaders in Canada or the European Union, President Claudia Sheinbaum of Mexico has said little publicly during the recent trade dispute, even as her government is heavily focused on the issue. Mexico’s ambassador to China, Jesús Seade, helped create the W.T.O. in the early 1990s and played a central role in Mexico’s renegotiation of NAFTA with President Trump in 2018.
China is fortunate that Vietnam, its biggest partner for indirect exports to the United States, trades under different rules than Mexico because it did not join the W.T.O. until 2007. The trade organization has required developing countries that joined after 1995 to accept lower ceilings on their bound tariffs.
Vietnam applies an average tariff of 9 percent, and the average bound tariff it could apply goes up to only 12 percent. Industrialized countries, like Canada, also have low bound tariffs that limit their ability to charge more on goods from China.
China’s economy is highly dependent on a large and ever-widening trade surplus, which reached almost $1 trillion last year. Nearly all of China’s exports are manufactured goods, and its surplus in these goods equaled roughly a tenth of its entire economy last year.
That is a level the United States did not attain even after World War II, when American industry quickly reverted to civilian production and ramped up exports as much of the rest of the world lay in ruins.
China is dependent on rising exports because a housing market crash has left Chinese households reluctant to spend, limiting the economy’s ability to grow in other ways.
Another vulnerability is that much of China’s trade surplus is with developing countries. These countries, in turn, rely on running their own trade surpluses with the United States to pay for the goods they import from China, drawing the ire of Mr. Trump.