On May 30, U.S. President Donald Trump announced that Washington would impose 5 percent tariffs on all imported goods from Mexico effective from June 10 in response to the ongoing migrant crisis. The tariffs are aimed at forcing Mexico to address illegal migrants traveling through the country into the U.S.
An official statement released by the White House on May 30 confirmed that if Mexico did not address the migrant issue, tariffs would be raised to 10 percent on July 1, 15 percent on August 1, 20 percent on September 1, and 25 percent on October 1. The tariffs would remain fixed at the 25 percent level “unless and until Mexico substantially stops the illegal inflow” of immigrants into the U.S. However, the Trump administration has not specified what Mexico would need to achieve in order to have the tariffs successfully removed.
The tariffs and possible, subsequent retaliatory actions by Mexico are set to have significant implications for producers and consumers on both sides of the border, affecting the cross-border flow of goods between the two countries, and will impact cars, electronics, computer hardware, medical devices, machinery, plastics, aerospace components, mineral fuels, and agricultural products. Mexico is the United States’ second largest supplier of goods with imports totaling USD 346.5 billion (EUR 311.3 billion) in 2018, and a 5 percent tariff would generate USD 18 billion (EUR 16.13 billion) in tax revenue.
It remains unclear whether Mexico will retaliate with tariffs of its own and the extent to which counter-measures would be taken. Jesus Seade, Mexico’s top diplomat for North America, warned that the tariffs would be “disastrous” and that the country “must respond vigorously” to the latest round of tariffs. Meanwhile, Mexican President Andrés Manuel López Obrador hit back in a public letter, decrying President Trump’s plan to impose a 5 percent tariff on Mexican imports and urging the Trump’s administration to avoid a trade war with Mexico.
The latest round of tariffs have stemmed from accusations leveled by President Trump against Mexico for not doing enough to halt the flow of Central American migrants coming from countries such as El Salvador, Honduras, and Guatemala to the U.S. in search of asylum. The number of Central American asylum-seeking families crossing the U.S.-Mexico border reached record levels in April 2019, with Border Patrol agents apprehending over 98,000 people during the month. President Trump has also previously repeatedly threatened to close the entire 1,954-mile border with Mexico if its southern neighbor did not act to stop the migrant flow. He later retreated from that threat by giving Mexico a “one-year warning” instead and threatening heavy auto tariffs on cars coming into the United States.
The latest tariff threat raises serious questions about the current fate of the U.S.-Mexico-Canada (USMCA) trade agreement as it comes at a curious moment. The tariffs appear to contradict the U.S. announcement on May 17 that Washington would be lifting steel and aluminum tariffs on Mexico and Canada. In light of this, Mexican President Andrés Manuel López Obrador had announced on May 30 his government’s intention to send the treaty to the Mexican Congress for ratification; similarly, Canada has taken its first step towards ratifying the agreement following U.S. Vice President Mike Pence’s visit on May 30 to Ottawa.
SUPPLY CHAIN IMPACTS
The tariffs proposed by the Trump administration will hit a number of global companies with supply chain networks in North America and rising costs are likely to be borne by U.S. consumers for goods such as vehicles, refrigerators, and television sets. In 2018, vehicles and auto parts made up the largest imports from Mexico to the U.S. with USD 93.3 billion (EUR 83.9 billion), followed by electric machines, nuclear reactors, minerals and oil, and optical equipment. Reciprocally, in 2018, US auto part exports to Mexico amounted to USD 32.5 billion (EUR 29.13 billion).
The auto industry will be particularly vulnerable given how many global carmakers manufacture vehicles in Mexico to take advantage of cheaper labor and the close proximity to the U.S. market. For example, as 70 percent of wire harnesses used in North American car production come from Mexico, any adverse impact to its production would notably complicate assembly operations. The impact of the proposed tariff is anticipated to decrease US auto production by 18%, to a tune of 3 million vehicles per year, due to the 25% increase in production cost from the ultimate result of the tariffs. However, the impact on suppliers is relatively unknown as components can cross the Southern border up to 20 times before they are made into assembled cars. Major global auto companies with a strong manufacturing presence in Mexico include General Motors, Ford, Fiat Chrysler, Nissan, Toyota, and Volkswagen.
Reports indicate that Mexico’s Secretary of Foreign Affairs Marcelo Ebrard is in Washington, DC to negotiate with U.S. officials. But recent comments by Jesus Seade indicate that Mexico is ready to respond forcefully in the event of the tariff’s implementation. Figures for May border apprehensions have yet to be released by US Customs and Border Protection (CBP), which, when released, will either reinforce or weaken President Trump’s claims regarding increased border insecurity as a result of alleged inaction by Mexico with respect to the Central American migrant issue.
As these developments emerge in the midst of negotiations over the USMCA trade accord, the tariff threat places the future of the agreement in jeopardy, and may set negative precedents for other trade negotiations, such as those with China. Therefore, those engaged in cross-border trade between the US and Mexico should closely monitor developments through June 10 and beyond, and, in the event of a possible adverse outcome, should plan accordingly. Resilience360 will continue to monitor these events and report further developments as they occur.