Commentary:
The latest twist in the U.S.-China trade war resulted in a lowering of U.S. tariffs of 145 percent on Chinese imports to 30 percent, and a lowering of 125 percent tariffs on U.S. imports into China to 10 percent. Additionally, a sort of truce was declared for 90 days as negotiations take place. This essentially puts tariffs on Chinese imports into the U.S. where they were before the trade war escalated and both countries slapped triple-digit tariffs on each other’s products. While the latest development is a positive one for U.S. consumers, who won’t be faced with astronomical tariffs on Chinese products, things can change after the 90-day reprieve, and both sides could start scuffling again.
Going forward, the U.S. will have to deal with another sore point with China: the establishment of Chinese companies over the border in Mexico. In an attempt to escape the U.S.-China trade war, many Chinese companies and affiliates have moved production or set up satellite production in Mexico in cities such as Juarez and Tijuana. This is done not only to avoid U.S. import tariffs on their products, but also to benefit from the reduced or zero tariffs on products being manufactured in North America per the U.S-Mexico-Canada-Agreement (USMCA). Generally, under the USMCA, if products manufactured in North America meet North American content rules in terms of labor and materials, they can be shipped to USMCA partners with no tariffs imposed.
The Trump Administration is having heartburn with this trend and has threatened tariffs on Chinese companies producing in Mexico and shipping their products to the U.S., while benefiting from the USMCA. On the flip side of the coin is Mexico, which strongly encourages foreign companies to invest in the country, thus creating economic development opportunities, jobs, and a multiplier effect in the communities in which they are located. Mexican President Claudia Sheinbaum has had to walk a fine line in encouraging Chinese companies to set up shop in Mexico and further antagonizing Trump.
A possible solution to this issue could involve the creation of a modified version of a customs union, in which by trade agreement, two or more countries lower tariffs on each other’s products while developing a unified common external tariff on imports from non-member countries. When the organization that eventually became the European Union was formed in the mid-1950s, it rapidly progressed to a customs union, with original members working on tariff reduction among its members and a common external tariff policy towards non-members.
In a simple North American application, this would entail USMCA members Mexico, Canada, and the U.S. to continue lowering tariffs among themselves, while developing an agreed-upon tariff on Chinese goods entering either of the three countries. A twist on a North American customs union could be a common policy among members on foreign investment, in this case from China, in either of the three USMCA countries. The three USMCA nations could develop a common policy to address Chinese investment in North America, which would prevent China from fighting a trade war with the U.S. and going through the backdoor (Mexico) to avoid U.S. tariffs.
Mexico, Canada, and the U.S. could also develop a policy applying special tariffs on Chinese companies in North America to make sure that their products are not moving tariff-free to destinations in either of the three countries. I’m sure that China would complain about the targeted discrimination of its companies’ North American-manufactured products. It could also file a case with the World Trade Organization (WTO), of which it and the three USMCA countries are signatories. However, by blocking portions of its market to foreign companies and forcing foreign companies operating in China to share their technology, the USMCA countries would have their own case to impose the tariffs while fighting China within the WTO.
Per agreement, the USMCA is up for review in 2026. The concept of a customs union and agreeing on policies to not allow China a backdoor to North American markets could be worked into the renegotiated agreement. If this is not possible, Mexico, Canada, and the U.S. could collectively negotiate something outside of the USMCA.
However, the formation of a customs union would take trust and goodwill among the three North American partners, which might not exist at this point. This is certainly not helped by Trump calling for Canada to become the fifty-first U.S. state, and threatening both Mexico and Canada with tariffs on what he believes has been an unfair trade relationship based on the trade deficits the U.S. runs with both of its neighbors. Moving forward, the U.S. has to rebuild trust with its USMCA partners if it wants to successfully deal with Chinese trade in the future.
Jerry Pacheco is President of the Border Industrial Association. Jerry Pacheco's opinions are his own and do not necessarily reflect the views of KRWG Public Media or NMSU.