Mexico Lobbying the White House
Negotiations between the US and Mexico officials ended on the 5th of June, and the two sides were not able to reach an agreement. Officials of the two countries will talk again on the following day and the United States threatened that if an agreement still cannot be reached, tariffs on all Mexican exports to the US would be imposed effective from 10 June. Trump announced last week that the White House will impose tariffs on all imported Mexican goods unless Mexico committed itself to restraining illegal immigration to the U.S. The initial tariff is set at 5% and will be levied from June 10, and gives all relevant parties an impetus to take essential actions and arrive at an agreement before then.
Senior members of the Mexican cabinet had arrived in Washington this week, already met with US officials, and worked to resolve diplomatic and economic confrontations between the two sides. Marcelo Ebrard, Chief Negotiator and Foreign Minister of Mexico, gave a speech earlier today at the Mexican Embassy in Washington. He was very optimistic about reaching an agreement, saying that Mexico was preparing to make a new proposal to the Trump government. Ebrad said on Twitter, “We will work hard to reach an agreement. This is feasible and desirable. The chance of reaching an agreement is 80/20.” However, it turned out that today’s talk between the two countries collapsed.
If Trump does impose tariffs, then Lopez Obrador will be constrained by the reality of unequal relations with the U.S. This gives him little ability to bargain, and the social situation in Mexico would be grim. Mexico’s open, export-oriented economy is more dependent on trade than the US is. Mexico relies on a single market; 80% of Mexico’s exports go to the U.S., not to mention that investment in the US is more than six times that of Mexico’s investment, and that the US economy is more than 16 times larger than Mexico.
The impact of the U.S. tariff on Mexico
Goldman Sachs commented that the 5% tariff is basically fixed for all goods in consideration of US’ plans to impose tariffs on Mexico. The force of tariffs will significantly reduce the probability that the new US-Mexico-Canada North American Free Trade Agreement USMCA will pass before the 2020 US presidential election. Democrat leaders will slow down the review of USMCA, and Mexico will no doubt slow down its own approval process in retaliation. The probability of passing the bill this year is basically zero. Fitch predicted on Tuesday that if Trump’s tariff threat to Mexico becomes a reality, it will probably affect one-fifth of Mexican companies. Official data from Reuters showed that Mexico’s exports to the U.S. last year totalled $347 billion, and the 5% tariff basically means an increase of $1 billion on last year’s figure from June 10 to 30. If tariffs continue to rise, the cost will be even higher.
Considering the scale of Trump’s tariffs, the biggest impact should be towards the automotive industry. Fitch’s previous report pointed out that “the North American automotive industry has been facing difficulties.” Reuters said on Tuesday that major automakers such as Toyota Motor Corp. began assessing their own tariff costs and tariff costs within the supply chain. Toyota is worried that its suppliers will pay up to $1 billion in tariff fees. However, according to comments from White House officials, the Trump administration is not likely to give a green light to Mexico just for the tariffs’ impact on the bilateral economies.
The hope from White House Senior Trade Advisor
At 3 pm EST on Wednesday (5 am on Thursday in Australia), the Mexican high-level delegation led by Foreign Minister Marcelo Ebrard met with senior U.S. officials in Washington. Just earlier on Wednesday morning, Trump’s senior trade adviser and one of the Republican Senate leaders, Peter Navarro, let the market see hope that the U.S. and Mexico will reach an agreement. Navarro told CNN that Mexican officials still had time to avoid tariffs. It now appears that the US may not actually enforce the tariffs on imported Mexican goods.
The benefit of their geographical proximity makes trading between these two countries convenient. Thus, Mexico’s logistics and transportation costs are low, and it can respond quickly to changes at the end of supply chain demand. Most importantly, the tax rate for entering the US market through Mexico is much lower even in countries where high tariffs are imposed, so that manufacturers can use Mexico as a port city for ease of transit. If Trump doesn’t do anything about this “loophole”, the “manufacturing industry comeback” that Trump hopes for will likely not materialise. The East Asian industrial chain, which is bound by tariffs, will shift the industry to Mexico, where it will be able to enjoy lower production costs.
A White House official on Wednesday morning indicated that while trade and other aspects of U.S.-Mexican relations are important, national security still remained the number one priority. Tariffs remained the only option for Trump to push Mexico into cooperation on the issue of illegal immigration. The official warned that if immigration inflow cannot be curbed, the White House will take further actions to address the issue.
By Oliver Ju
Click here for a 7 days access to our Lotus Blue Portal.