Trade Diversion and Jobs: Evidence from Mexican Municipalities

This paper examines the local effects of the 2018–19 U.S.-China trade disruptions on Mexico. Combining detailed municipal-level customs data with U.S. tariff schedules, it estimates that municipalities with greater export concentration in products targeted by U.S. tariffs on China (hereafter, tariff exposure) experienced significantly larger nearshoring dividends. An increase of 1 percent in tariff exposure led to a 4.3 percent increase in municipality-level exports to the United States. These export gains translated into broad labor market improvements: total labor income rose by 5.6 percent for each 1 percent increase in tariff exposure, driven by job creation rather than wage growth as average earnings remained unchanged. Beyond job quantity, the shock improved job quality: each 1 percent increase in tariff exposure reduced labor informality by 0.25 percentage points, with newly created jobs disproportionately being formal. Effects were driven primarily by manufacturing but extended to services through local spillovers. The findings indicate that trade policy changes between major economies can significantly reshape the spatial distribution of economic activity and the quantity and quality of jobs in third-party countries.