How a 25% Tariff on Mexican Imports Could Affect the US Economy
The United States and Mexico are close trading partners, with a total of $678 billion worth of goods and services exchanged in 2019. However, this relationship has been strained by the Trump administration’s decision to impose a 5% tariff on all Mexican imports starting from June 10, 2019, and to increase it gradually to 25% by October 1, 2019, unless Mexico takes action to stop the flow of illegal migrants across the border.
What are the potential impacts of this tariff hike on both countries?
Here are some key points to consider:
1. The Tariff Would Raise The Prices Of Many Consumer Goods In The US
The tariff would raise the prices of many consumer goods in the US, such as cars, appliances, fruits, vegetables, beer, and tequila. According to the US Chamber of Commerce, a 25% tariff would cost American consumers $86 billion per year.
2. The Tariff Would Also Hurt Many US Businesses That Rely On Mexican Inputs Or Exports
The tariff would also hurt many US businesses that rely on Mexican inputs or exports. For example, the US auto industry imports about $59 billion worth of parts from Mexico annually, and exports about $32 billion worth of vehicles to Mexico. A 25% tariff would disrupt these supply chains and reduce the competitiveness of US automakers in the global market.
3. The Tariff Would Reduce The Economic Growth And Employment In Both Countries
The tariff would reduce the economic growth and employment in both countries. According to a study by Perryman Group, a 25% tariff would result in a loss of 1.2 million jobs in the US and 1.8 million jobs in Mexico over five years. It would also lower the GDP of the US by $190 billion and the GDP of Mexico by $120 billion over the same period.
4. The Tariff Could Trigger A Trade War And Retaliation From Mexico And Other Countries
The tariff could trigger a trade war and retaliation from Mexico and other countries. Mexico has already announced that it would impose reciprocal tariffs on US products, such as pork, cheese, apples, potatoes, and whiskey. Other countries that have trade agreements with Mexico, such as Canada and the European Union, could also join the dispute and impose tariffs on US exports.
5. The Tariff Could Undermine The Ratification Of The United States-Mexico-Canada Agreement
The tariff could undermine the ratification of the United States-Mexico-Canada Agreement (USMCA), which is supposed to replace the North American Free Trade Agreement (NAFTA). The USMCA was signed by the three countries in November 2018, but it still needs to be approved by their legislatures. The tariff could jeopardize this process and create more uncertainty for businesses and investors.
A 25% tariff on Mexican imports could have significant negative effects on the US economy and its relations with its southern neighbor. It could also backfire on the Trump administration’s goal of reducing illegal immigration, as it could worsen the economic and social conditions in Mexico and push more people to seek opportunities in the US.
The Impact of Tariffs on Mexican Imports
The United States and Mexico are major trading partners, with a bilateral trade value of $678.3 billion in 2020. However, the trade relationship has been strained by the imposition of tariffs on some Mexican products by the U.S. government, as well as the threat of further tariffs if Mexico does not curb illegal immigration. In this article, we will examine the effects of these tariffs on the global demand for Mexican imports, focusing on three sectors: steel, autoparts, and chemicals.
Steel
Steel is one of the most affected products by the U.S. tariffs on Mexican imports. In 2019, the U.S. announced a 25% tariff on steel imports from Mexico, as part of its Section 232 national security investigation. This tariff was lifted in 2020, after Mexico agreed to impose export quotas on its steel shipments to the U.S. However, in 2023, Mexico increased its own import tariffs on steel products from non-Free Trade Agreement countries, ranging from 5% to 25%, in order to protect its domestic industry and prevent dumping. According to the Mexican government, this measure covers 219 tariff lines and affects 56% of Mexico’s steel imports.
The impact of these tariffs on the global demand for Mexican steel is mixed. On one hand, the U.S. tariffs reduce the competitiveness of Mexican steel in the U.S. market, which is its main destination, accounting for 77% of its steel exports in 2020. On the other hand, the Mexican tariffs increase the cost of steel inputs for Mexico’s export-oriented manufacturing sectors, such as automotive and electronics, which may reduce their demand for foreign steel and increase their demand for domestic steel. Moreover, the Mexican tariffs may also create opportunities for Mexican steel exporters to diversify their markets and seek new customers in other regions, such as Europe and Asia.
Autoparts
Autoparts are another important product affected by the U.S. tariffs on Mexican imports. In 2019, the U.S. threatened to impose a 5% tariff on all Mexican imports, including autoparts, if Mexico did not take action to stop illegal immigration across the border. This tariff was later suspended after Mexico agreed to deploy its National Guard and accept more asylum seekers from Central America. However, the uncertainty caused by this threat had a negative impact on the investment and production plans of many autoparts manufacturers in Mexico, who rely heavily on the U.S. market for their sales and supply chains.
The impact of this tariff threat on the global demand for Mexican autoparts is also mixed. On one hand, the tariff threat reduced the confidence and profitability of many autoparts producers in Mexico, who faced higher costs and lower revenues due to the potential tariff imposition. On the other hand, the tariff threat also increased the incentive for some autoparts producers to relocate their operations from China to Mexico, in order to avoid the higher tariffs imposed by the U.S. on Chinese imports as part of its trade war with China. This relocation may increase the supply and demand for Mexican autoparts in both domestic and foreign markets.
Chemicals
Chemicals are a third product affected by the U.S. tariffs on Mexican imports. In 2023, Mexico increased its import tariffs on chemicals from non-Free Trade Agreement countries, ranging from 5% to 25%, as part of its Sectoral Promotion Program (PROSEC), which aims to support its export manufacturing sector by reducing tariffs on key inputs. According to the Mexican government, this measure covers 11 tariff lines and affects 2% of Mexico’s chemical imports.
The impact of these tariffs on the global demand for Mexican chemicals is positive. The tariffs reduce the cost of chemical inputs for Mexico’s export-oriented sectors, such as automotive and electronics, which may increase their demand for domestic chemicals and reduce their demand for foreign chemicals. The tariffs also increase the competitiveness of Mexican chemical exports in foreign markets, especially in those where Mexico has Free Trade Agreements, such as Canada and Europe.
The U.S. tariffs on Mexican imports have had a mixed impact on the global demand for Mexican products, depending on the sector and product involved. The tariffs have generally reduced the demand for Mexican products that compete directly with U.S. products in the U.S. market, such as steel and autoparts. However, they have also increased the demand for Mexican products that complement or substitute U.S. products in other markets, such as chemicals and some autoparts. Moreover, Mexico’s own tariffs on imports from non-Free Trade Agreement countries have also affected the global demand for Mexican products, either positively or negatively depending on whether they reduce or increase their costs and competitiveness.
References:
https://ustr.gov/sites/default/files/files/Press/Releases/301FRN.pdf
https://www.trade.gov/knowledge-product/mexico-import-tariffs
https://www.foley.com/en/insights/publications/2023/08/mexico-increases-import-tariffs-non-free-trade
https://www.trade.gov/market-intelligence/mexico-temporary-tariff-increase
https://www.trade.gov/knowledge-product/mexico-import-tariffs
https://www.foley.com/en/insights/publications/2023/08/mexico-increases-import-tariffs-non-free-trade
https://www.trade.gov/market-intelligence/mexico-temporary-tariff-increase
https://www.uschamber.com/sites/default/files/final_state_by_state_analysis_of_trumps_mexico_tariffs.pdf
https://www.perrymangroup.com/wp-content/uploads/Perryman_US_and_Mexico_Trade_Report_2019.pdf
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