Trade Diversion and Labor Market Outcomes

Abstract:

In 2018 the US administration has increased tariffs on imports from China. Do these tariffs merely reduce imports from China into the US, or do they at the same time lead to more imports from other countries such as Mexico? Standard trade theory predicts that a change in relative trade costs leads to trade diversion. The aim of this paper is to test this proposition empirically using detailed Mexican firm-level export and import data. We find evidence of trade diversion from China to Mexico as higher US tariffs against China have increased Mexico's export growth to the US. Higher US tariffs against China have also reduced Mexico's export growth to China and increased Mexico's import growth from the US. We then combine the trade data with matched employer-employee data to investigate the labor market outcomes of formal workers employed in Mexico's manufacturing sector. We find that trade diversion has increased the demand for labor of firms exposed to higher US tariffs against China, with low-wage individuals including female, unskilled, and younger workers experiencing a disproportionate increase in employment and wages.