The US-China trade conflict of 2018 and 2019 marked a turning point in global commerce, with the US imposing sweeping tariffs on Chinese imports and China responding in kind. While much of the focus centered on the direct impact to the world’s two largest economies, these policies also set off a wave of trade diversion that reshaped supply chains and created new winners and losers across the globe. Among the most notable beneficiaries was Mexico, whose exports to the US surged as American importers sought alternatives to now-costlier Chinese goods.
Research shows that a 25 percentage point increase in US tariffs on Chinese goods led to a 4.2% jump in Mexican exports to the US, driven both by higher volumes and a broader range of products. This was made possible by Mexico’s competitive labor costs, proximity to the US, and favorable trade agreements like NAFTA (and later USMCA), all of which made it easier and cheaper for US companies to pivot their sourcing south of the border.
But the effects went beyond trade statistics. The surge in exports translated into tangible labor market gains for Mexican workers. Detailed data tracking individual workers revealed that as Mexican firms ramped up production to meet US demand, employment rose—particularly in technology and skill-intensive manufacturing sectors such as chemicals, rubber, plastics, machinery, and automotive. Notably, the new job opportunities and wage gains were concentrated among groups that have historically faced disadvantages in the labor market: women, unskilled, younger, and non-permanently insured workers saw the most significant improvements, with women’s wage increases roughly double those of men.
However, this hiring boom also brought a shift in workforce composition. As firms hired more low-wage workers to meet demand, average wages at the firm level actually declined slightly, even as total employment rose. This suggests that trade diversion had an equalizing effect within firms, reducing wage inequality by lifting up the lowest earners.
The Mexican experience illustrates how major shifts in global trade policy can create significant spillover effects, benefiting third-party countries and altering the economic landscape in unexpected ways. As new rounds of tariffs and trade disputes emerge, the lessons from 2018 and 2019 highlight the complex interplay between protectionism, supply chains, and labor markets—and the opportunities that can arise for those positioned to seize them.
