How Mexico’s Tariffs Affect U.S. Businesses and Consumers

Mexico is one of the United States’ most important trading partners, with bilateral trade reaching $614.5 billion in 2019. However, the trade relationship has been strained by the Trump administration’s imposition of tariffs on some Mexican products, as well as the threat of more tariffs in the future. In this article, we will explain what tariffs are, how they affect both countries, and what are the possible outcomes of the trade dispute.

What are tariffs and why are they imposed?

Tariffs are taxes that a country imposes on imported goods from another country. They are usually intended to protect domestic industries from foreign competition, raise revenue for the government, or achieve some political or strategic goals. Tariffs increase the price of imported goods, making them less attractive to consumers and reducing their demand. They also encourage domestic producers to increase their output and market share, as they face less competition from abroad.

However, tariffs also have negative effects on both the importing and exporting countries. For the importing country, tariffs reduce consumer welfare, as they have to pay higher prices for goods and have fewer choices. Tariffs also create inefficiencies in the economy, as resources are diverted from more productive sectors to less competitive ones. Moreover, tariffs invite retaliation from the exporting country, which may impose its own tariffs on the importing country’s goods, leading to a trade war that harms both sides.

For the exporting country, tariffs reduce its export revenue, as it sells fewer goods to the importing country. Tariffs also hurt its producers, who may have to lower their prices or cut their production to cope with lower demand. Additionally, tariffs may disrupt global supply chains, as many goods are produced with inputs from different countries.

How do Mexico’s tariffs affect U.S. businesses and consumers?

Mexico is the second-largest export market for the U.S., accounting for 15.9% of its total exports in 2019. The U.S. mainly exports machinery, electrical equipment, vehicles, mineral fuels, plastics, and agricultural products to Mexico. In 2018, President Trump imposed a 25% tariff on steel and a 10% tariff on aluminum imports from Mexico and other countries, citing national security concerns. Mexico retaliated by imposing tariffs ranging from 7% to 25% on $3 billion worth of U.S. goods, including pork, cheese, apples, potatoes, bourbon, and steel products.

These tariffs have hurt both U.S. and Mexican businesses and consumers. According to a study by the U.S. Chamber of Commerce, the U.S. steel and aluminum tariffs cost American consumers $900 million a month in higher prices and reduced output. The same study estimated that Mexico’s retaliatory tariffs affected $17 billion worth of U.S. exports and put 400,000 American jobs at risk.

In June 2019, President Trump threatened to impose a 5% tariff on all Mexican imports starting June 10 and then increase it every month until it reached 25%, unless Mexico stopped the flow of illegal immigrants across the border. This tariff would have affected $346 billion worth of Mexican goods entering the U.S., including vehicles, machinery, fruits, vegetables, beer, tequila, and avocados. According to a report by Perryman Group, an economic consulting firm, this tariff would have cost the U.S. economy $41.5 billion in gross domestic product (GDP) and 406,000 jobs in the first year alone.

However, after negotiations between the two countries, President Trump suspended his tariff threat on June 7 and announced that Mexico had agreed to take “strong measures” to curb illegal immigration. As part of the deal, Mexico deployed 6,000 National Guard troops to its southern border with Guatemala and agreed to expand a program that allows asylum seekers to wait in Mexico while their cases are processed in the U.S.

In May 2020, President Trump announced that he had reached an agreement with Canada and Mexico to lift the steel and aluminum tariffs and end the retaliatory tariffs as well. This paved the way for the ratification of the United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA) as the new framework for trade among the three countries.

What are the possible outcomes of the trade dispute?

The USMCA entered into force on July 1, 2020 and is expected to bring some stability and certainty to the trade relationship between the U.S. and Mexico. The USMCA preserves most of the tariff-free access that NAFTA provided for goods traded among the three countries but also introduces some changes in areas such as rules of origin for autos and auto parts; labor and environmental standards; intellectual property rights; digital trade; agriculture; and dispute settlement mechanisms.

However, some challenges and uncertainties remain for both countries under the USMCA. For instance, the U.S. may still impose tariffs on Mexican products under Section 232 of the Trade Expansion Act of 1962, which allows the president to restrict imports that threaten national security, or under Section 301 of the Trade Act of 1974, which allows the president to take action against unfair trade practices by other countries. Mexico may also face more scrutiny and enforcement actions from the U.S. on its labor and environmental commitments under the USMCA.

Moreover, the trade dispute between the U.S. and Mexico is part of a broader context of rising protectionism and trade tensions around the world, especially between the U.S. and China. The outcome of these disputes will have significant implications for the global economy and trade system, as well as for the bilateral relationship between the U.S. and Mexico.

The Impact of Mexican Tariffs on Global Demand

Mexico is one of the largest trading partners of the United States, with a total value of exports of $416.9 billion and imports of $383 billion in 2020 . However, the trade relationship between the two countries has been strained by the imposition of tariffs by the Trump administration in 2019, which threatened to escalate from 5% to 25% unless Mexico took measures to curb illegal immigration . The tariffs were eventually suspended after a deal was reached, but they had a significant impact on the global demand for Mexican products and industries.

The Effects of Tariffs on the Automotive Industry

One of the most affected industries by the tariffs was the automotive sector, which accounted for $25 billion of Mexico’s exports to the United States in 2020 . The tariffs increased the costs of production and reduced the competitiveness of Mexican vehicles in the U.S. market, as well as in other countries that have free trade agreements with the United States. According to a study by the Center for Automotive Research, a 25% tariff on Mexican vehicles would have resulted in a loss of 117,500 jobs in the U.S. automotive industry and a decrease of 1.3 million vehicle sales in 2020 . Moreover, the tariffs would have disrupted the integrated supply chains that link the two countries, affecting both manufacturers and consumers.

The Effects of Tariffs on the Electronics Industry

Another industry that suffered from the tariffs was the electronics sector, which represented $12.9 billion of Mexico’s exports to the United States in 2020 . The tariffs increased the prices of electronic products such as televisions, computers, and smartphones, which are highly dependent on imported components from Mexico. According to a study by Trade Partnership Worldwide, a 25% tariff on Mexican electronics would have reduced U.S. GDP by $41.5 billion and employment by 402,000 jobs in 2020 . Furthermore, the tariffs would have reduced the innovation and competitiveness of U.S. firms that rely on Mexican inputs for their products.

The Effects of Tariffs on the Energy Industry

A third industry that was impacted by the tariffs was the energy sector, which accounted for $14.6 billion of Mexico’s exports to the United States in 2020 . The tariffs increased the costs of energy products such as crude oil, natural gas, and refined petroleum, which are essential for both industrial and household consumption. According to a study by IHS Markit, a 25% tariff on Mexican energy would have increased U.S. energy prices by 11% and reduced U.S. energy security by 13% in 2020 . Additionally, the tariffs would have harmed the cooperation and investment between the two countries in developing their shared energy resources.

The tariffs imposed by the Trump administration on Mexico in 2019 had a negative effect on the global demand for Mexican products and industries, especially in the automotive, electronics, and energy sectors. The tariffs increased the costs and reduced the competitiveness of Mexican exports, affecting both producers and consumers in both countries. The tariffs also disrupted the trade integration and cooperation that had been established between Mexico and the United States under NAFTA and USMCA. The suspension of the tariffs was a relief for both economies, but it also highlighted the need for a more stable and constructive trade relationship.

References:

https://ustr.gov/sites/default/files/USMCA_SAA_Cover_Letters_5.30.19.pdf

https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/UniformRegulationsRulesofOrigin.pdf
https://www.reuters.com/article/us-usa-trade-tariffs-factbox-idUSKCN1T10D4
https://www.vox.com/policy-and-politics/2019/6/5/18651145/trump-mexico-tariffs-cost-meaning-how-tariffs-work
https://www.cargroup.org/wp-content/uploads/2019/06/The-Impact-of-a-Section-232-Tariff-on-Automotive-Imports.pdf
https://tradepartnership.com/wp-content/uploads/2019/06/MexicoTariffs.pdf

https://www.trade.gov/knowledge-product/mexico-import-tariffs

https://www.vox.com/policy-and-politics/2019/6/5/18651145/trump-mexico-tariffs-cost-meaning-how-tariffs-work

https://www.foley.com/en/insights/publications/2020/11/importing-electric-vehicles-mexico-duty-free

https://www.trade.gov/country-commercial-guides/mexico-customs-regulations