Mexico tariffs a peril to US economy

NEW YORK • When trade tensions with China flared last year, many companies sought refuge in a country with a long, stable relationship with the United States: Mexico.

Now, that alternative for production and materials may also be in jeopardy with US President Donald Trump's threat to impose escalating tariffs on imports from Mexico, aimed at forcing action on illegal immigration.

In the short term, the tariffs would mean lower profits for American importers and higher prices for American consumers. In the long run, they could force companies to reconsider the continent-spanning supply chains that have made North America one of the world's most interconnected economies.

That disruption, experts warn, could be far more damaging to the US economy than the cost of tariffs.

The US imported more than US$345 billion (S$474 billion) in goods from Mexico last year and shipped US$265 billion the other way. But if anything, these numbers understate the interdependence.

American refiners process crude oil from Mexico, then sell it back as petrol. About 30 per cent of the content of Mexican exports originated in the US, according to a recent study.

"Our ties to Mexico are in many ways much more immediate than China and in some ways, much more powerful," said Mr Pete Guarraia, who leads supply chain consulting for Bain.

Mr Trump has often criticised Mexico and the US companies that have relocated production there.

But his trade policies have largely focused on China, a target of successive rounds of tariffs on billions of dollars in imports.

US companies have responded by moving production and supply chains out of China, in some cases to Mexico, which this year has displaced China as the US' top trading partner.

The attraction of doing so only increased when the US, Mexico and Canada reached a deal last autumn to replace the North American Free Trade Agreement.

Now, those plans have been thrown into turmoil.

"Mexico was the place that people were looking to move to," said Mr Joseph Fitzgerald, a partner in Deloitte's supply-chain practice. "Now it's, 'Gosh, we just got through one wave of supply chain strategy and structural change and now we need to start a new round'."

Economists said the direct effects of a tariff of 5 per cent or even 10 per cent would probably be small, especially with a strong economy and low inflation.

The larger threat, they said, was the disruption they could cause for carmakers and others who have come to rely on supply chains that seamlessly cross international boundaries. Those supply chains will not fray overnight, said Mr Brian Dunch, a trade expert at PricewaterhouseCoopers. But over time, they could break down, particularly if companies decide they cannot trust trade rules to be consistent.

"It's the cumulative effect of all this uncertainty," he said. "You'll see supply chains Balkanise."


A version of this article appeared in the print edition of The Straits Times on June 03, 2019, with the headline 'Mexico tariffs a peril to US economy'. Print Edition | Subscribe