Import Duties to Be Paid in U.S. to Solve Immigration and Bring Back Manufacturing. Really?

04 June 2019 Dashboard Insights Blog
Authors: Alejandro N Gomez-Strozzi Marcos Carrasco Menchaca

Due to what was firstly characterized as an illegal immigration crisis, and then as a measure to force companies to leave Mexico and return to the U.S., the Trump administration announced that starting June 10, 2019, it plans to impose 5% tariffs on ALL goods imported from Mexico; tariffs are then set to increase to 10% on July 1, 15% on August 1, 20% on September 1, and to 25% on October 1, 2019.  Decades-long chains of production under NAFTA, particularly with complex manufacturing scenarios such as in the auto industry, cannot be relocated within several months, or even years. 

Dollar-wise, motor vehicles, auto parts and trucks represent three of the four largest imports from Mexico (data processing machines being the remaining one), so the eventual impact in the auto sector would be enormous. Most importantly, we may be a handful of days away (possibly as early as June 10, 2019) from having predictability fly out of the window in the NAFTA / USMCA bloc, though the disruption on sophisticated chains of production should be measured on a case-by-case basis.

In the international trade arena, it is common knowledge that import duties are paid by importers, not the exporting country. Period. Thus, U.S. businesses and shortly thereafter U.S. consumers will start feeling the heat firstly, particularly when roughly 40% of the value of a Mexican-made automobile consists of U.S.-made intermediate materials that cross the border up to eight times until they climbed all the way up to a functioning car. So this is a negative "triple dipping" as the new tariffs would discourage cost-effective imports from a reliable trading partner and, in doing so, they would be affecting U.S. exports that went into Mexico a number of times, as well as increase costs of production in U.S. soil.

The full discretion with which the U.S. administration allowed President Trump to announce these tariffs gives room for the possibility of the measure being modified or somehow diluted, particularly in light of the across-the-board opposition from both Congress and the private sector. On the opposite side, the President is set to announce the launch of his reelection campaign on June 18, 2019. The campaign announcement may put pressure on him to keep his word on two contentious issues dear to his administration: trade and immigration.

Regarding Congressional approval of USMCA, Mme. Speaker Pelosi has already said that the announced tariffs are not wise trade policy and the President is again sowing chaos over the border; further, that the President took a "premature" action to advance the Agreement by starting the clock to submit the deal to Congress within 30 days, which would then trigger the House vote on it in 60 days. South-wise and under what is seen as conciliatory gesture right after the 5% tariffs announcement, the Mexican President said he would continue his efforts to pass the USMCA in the Senate; Canada does not (yet?) have a dog in this fight. Therefore, we are basically in the same predicament, with U.S. politics being the largest hurdle to clear in USMCA´s final approval (which we still believe will eventually occur).

Wow, the aforementioned is truly a rattle of the (NAFTA-bloc trade) cage. Companies shall revise the implications this might bring to their particular operations. Please try to answer the following questions:

  1. Do contracts with your clients and suppliers foresee what to do in an abrupt increase in costs, i.e. tariffs?
  2. Is providing a discount or credit to neutralize the 5% (or 10%, and so on) duty increase feasible, and would it have any effect on the seller or buyer´s tax or Customs situation?
  3. Can your company legally agree to split the payment of the incoming new tariffs?
  4. Does Mexico have any venues to neutralize the extra cost of tariffs?
  5. Is what the U.S. President did is even legal, and would it pass muster in U.S. Courts?
  6. What is Mexico planning to do, bring back "carousel" retaliatory tariffs?
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