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Proposed Mexico Tariff: Industry Winners and Losers

On January 26, White House Press Secretary Sean Spicer said the Trump Administration was considering imposing a 20.0% import tariff on Mexican goods. The Trump administration is currently weighing a number of options for comprehensive tax reform, of which a 20.0% import tariff is one proposal.  According to the United States International Trade Commission, general imports from Mexico accounted for $296.4 billion in 2015, making it the second-largest exporter to the US behind manufacturing behemoth China. More than 13.0% of all imports to the US came from Mexican companies in 2015, a figure that is expected to hold in 2016. A 20.0% import tariff levied against these goods would have varying impacts for importers and exporters, as well as consumers.

Winners

Ostensibly, an import tariff would stand to strengthen domestic manufacturing by cutting into the price advantage caused by lower labor costs and a confluence of other factors, which drives demand for Mexican imports. Consequently, industries that are heavily reliant on Mexican imports could possibly benefit from this tariff. Pumping up the price of cheaper imports would likely make some domestic manufacturers more competitive in the open market and incentivize reshoring. The automotive sector and intermediate-good exporters could be big winners if a tariff were put in place.

Of the 10 NAICS-reported automotive industries, imports from Mexico accounted for an average of 16.0% of domestic demand. This includes Mexican inputs in every step of the manufacturing process, from steering and suspension parts to seating and interior trim. The Truck and Bus Manufacturing industry runs a particularly high trade deficit with Mexico, as exports to the country account for less than 6.0% of revenue, but Mexican imports account for 62.0% of domestic demand. A free trade environment implemented by the North American Free Trade Agreement (NAFTA) has allowed Mexican auto exporters to leverage low wage costs and gain significant foothold in the American auto supply chain. The 20.0% tariff on automobiles coming from Mexico would negate some of the cost advantage that these exporters have been benefiting from, incentivizing reshoring and allowing current domestically manufactured trucks and buses to compete more effectively.

The domestic leather working market has also been afforded an opportunity by this potential tariff. Currently, the Leather Tanning and Finishing industry runs a considerable trade deficit to Mexico at nearly $1.0 billion. Leather is an expensive input cost and seeking out cheaper labor for the process keeps leather manufacturers’ downstream products competitive in a field where there are cheaper alternatives. Consequently, domestic operators often export raw materials to Mexican factories for tanning and finishing, only to be reimported. The 20.0% tariff could keep some finishing jobs done domestically and make American goods relatively cheaper. This trend holds true for other industries with high input costs supplied by American manufacturers that are fabricated in Mexico and reimported to the US, such as computer and electronic product manufacturers.

Losers

A potential tariff on Mexican goods opens the United States up to potential retaliatory tariffs on American goods entering Mexico, which could harm manufacturers that rely on exports to our southern neighbor. Plastic manufacturers and mineral and energy exporters in particular could end up on the losing end of this tariff.

More than an estimated $7.3 billion in plastic and resin materials were exported to Mexico in 2016, denoting a nearly $6.0 billion dollar trade surplus for this industry. High domestic input feedstock and a premium placed on innovation in this field have helped American plastic and resin manufacturers become a world leader. Mexican manufacturers do not benefit from such factors, but they have benefited from a lack of trade inhibitors based on NAFTA. Mexican imports satisfy 7.0% of the US Plastic and Resin Manufacturing industry’s revenue. Other oil-rich countries without such trade restrictions would likely step in if a retaliatory tariff were placed. Rubber and plastic hoses and belting exports to Mexico, made from domestic plastics, accounted for 15.0% of revenue in 2016.

Likewise, the Copper, Lead, Zinc and Nickel Mining industry’s exports to Mexico account for more than 20.0% of industry revenue. Other mineral and metal exporters would likely fill the gap left by American products that become too expensive under retaliatory tariffs. Additionally, while the Petroleum Refining industry has lucrative business both domestically and globally more than $15.0 billion in petroleum was exported to Mexico in 2015, a figure that could drop precipitously with a retaliatory tariff.

Proposed Mexico Tariff: Industry Winners and Losers PDF

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