Lower-paid workers in Mexican firms gained as exports shifted.

The global trade landscape is being reshaped. The most prominent fracture has been the US-China trade conflict. Prior to the latest round of tariffs imposed in 2025, the United States imposed sweeping tariffs on imports from China in 2018 and 2019 - and as with the latest round, the Chinese government retaliated. So what do we know about the effects of the 2018/19 US tariffs on Chinese imports?

A review of recent economic research by Fajgelbaum and Khandelwal (2022) finds that US consumers of imported goods bore the brunt of the tariffs through higher prices. What’s more, the aggregate real income in both countries was lowered, although not by large magnitudes relative to total GDP.

The effects of China-US trade conflicts ripple across the globe, creating both disruption and opportunities

There are strong reasons to believe that the tariffs also had an impact on other countries. For example, Utar et al. (2023) find that higher US tariffs had a positive effect on Mexican exporters involved in global value chains. And Alfaro and Chor (2023) highlight the "great reallocation" of global supply chains, including towards countries like Mexico. Our research contributes fresh evidence on how Mexico benefited through such "trade diversion" - and what those changes meant for Mexican workers. We document how the country's exports to the United States rose in response to US tariffs on China. Our data allow us to track individual workers over time. And we find positive labour market effects for Mexican workers, particularly among groups that are traditionally disadvantaged.

Can protectionism help bystanders?

Protectionist trade policies are usually thought to benefit producers in the protected country at the expense of consumers and global efficiency. But when a large economy like the United States imposes tariffs on a major trading partner, the resulting reallocation of global trade can create opportunities for third-party exporters. This is what's known as trade diversion.

The theory of trade diversion dates back to Viner (1950), who noted that preferential trade agreements and tariff changes can shift trade. In our context, US tariffs on China made Chinese goods more expensive, creating an incentive for US importers to switch to other suppliers - such as Mexico.

Figure 1 shows a striking pattern based on aggregate data. As the US import share from China declined following the imposition of tariffs in 2018/19, the import share from Mexico rose. This suggests that Mexico was able to fill part of the gap left by reduced Chinese exports to the United States.

Figure 1: Shares of US goods imports from China and Mexico in total US goods imports between 2010 and 2023 (%)

The Mexican economy is particularly well suited for our analytical purposes as there are strong reasons to believe that Mexican exports to the United States increased in response to higher US tariffs on China:

First, the costs for the United States of diverting imports from China to Mexico are comparatively low due to the competitive labour costs and geographical proximity of Mexico - and therefore low transport costs and short shipping times. Second, Mexico's membership of the North American Free Trade Agreement (which was replaced by the United States-Mexico-Canada Agreement in 2020) makes it easier for the United States to import more goods directly from Mexico than from other countries. Third, Mexico and China compete in the US market in similar product categories (Utar and Torres, 2013).

Evidence from firm-level trade data

To investigate the trade diversion hypothesis, we use detailed export data from Mexican firms. We link these data to changes in US tariffs on Chinese imports, and then examine how Mexican exports to the United States responded.

If we compare two different products, one targeted by a 25 percentage point increase in US tariffs on China and another one not targeted, we find a relative increase in Mexican exports to the United States of 4.2% for the targeted product. This increase occurs through both higher export volumes (the intensive margin) and a larger number of products exported (the extensive margin).

Women experienced a wage increase about twice the size of that for men

From trade to workers: labour market outcomes

Trade diversion also has important implications for workers. To understand the labour market effects, we combine our firm-level export data with detailed Mexican matched employer-employee data. This allows us to track changes in employment and wages at the worker and firm levels between January 2016 and December 2019.

First we look at the effect on workers. We estimate that a 1% increase in Mexican firm-level exports to the United States driven by higher US tariffs on China increased wages by 0.103% on average.

Strikingly, these wage gains were not evenly distributed. Wage increases were concentrated among women, unskilled, younger and non-permanently insured workers who typically receive lower wages than men, skilled, older and permanently insured workers. For example, we find that women experienced a wage increase about twice the size of the increase for men.

This is a key result. Our findings suggest that trade diversion in this setting had an equalising effect within firms. In other words, positive changes in exports benefited lower-wage workers more than higher-wage workers, reducing within-firm wage inequality.

We also find that trade diversion increased the wages of workers who stayed at the same employer. Workers who moved to new employers did not enjoy a wage increase in response to trade diversion.

Workforce composition effects

Further analysis at the firm level shows that trade diversion had a positive effect on employment and a negative effect on mean wages. Specifically, a 1% increase in firm-level US exports driven by higher US tariffs on China raised employment by 0.146% and reduced mean wages by 0.197%. These effects were concentrated in technology and skill-intensive manufacturing industries such as "Chemicals, rubber, and plastics" and "Machinery and automotive".

We argue that the employment increase is consistent with firms increasing production to satisfy the surge in export demand induced by higher US tariffs. The fall in the mean wage resulted from a composition effect. As firms increased employment, they disproportionately hired lower-wage workers including women, unskilled, younger and non-permanently insured workers.

Combining our results at the worker and firm levels, we conclude that trade diversion increased the demand for labour by firms exposed to higher US tariffs on China. This shift in labour demand increased both employment and wages, with the effects being more pronounced for women, unskilled, younger, and non-permanently insured workers.

Policy implications

Our results carry important implications. First, spillovers to third countries from large-country trade policy changes in 2018/19 were real and quantitatively important. Since the United States and China were two major economies engaged in a trade conflict, the effects rippled across the globe - creating both disruption and opportunities.

Second, the labour market benefits in Mexico were skewed toward groups that are traditionally disadvantaged. This points to an impact of trade diversion that reduced inequality within firms.

Finally, for the latest trade conflict, which started earlier this year, we should also expect diversion effects for trade and employment in third countries. But this time around, the US administration has targeted a larger number of countries and many more industries. As a result, there is much more uncertainty about the outcome, and the eventual impact is likely to be more complex.

---

21 October 2025     Paper Number CEPCP711

Download PDF - How the US-China trade conflict boosted exports and employment in Mexico

Download Press Release

This CentrePiece article is published under the centre's Trade programme.

This publication comes under the following theme: Inequality: Winners and losers