US importers saw round two of Donald Trump’s China tariffs bite earlier this month. The war on trade is set to continue. The duty rate on an estimated $200 billion dollars worth of imports increased from 10% to 25%. Trump is hinting at another $325 billion dollars worth of goods could come be at risk. It isn’t only China though who Trump has set his sights on.
Mexico trade now involved in the war on trade
You have to ask why US importers from Mexico have been dragged into a trade war. The trade deficit between the US & Mexico is relatively small with the USA importing $345 billion in 2018 whilst exporting $265 Billion.
What Mr Trump has always criticised is American companies relocating production to Mexico. What the China trade war has shown in the short term has been movement of production and supply chain not to the USA but to Mexico. Now if the US administration believe that increasing Tariff’s will force US manufacturers to bring production back to the USA upto now it has not worked.
How hard will Auto-makers be hit
You could argue that it is the US automotive industry which is being hit hardest. With the tariffs on imported steel into the USA as well as cross-border supply chain they will need to review there production practices.
General Motors have three Mexican plants that make some of its most important models. The Silverado and Sierra pickup trucks are produced in Mexico. The new Chevrolet Blazer and Fiat Chrysler as well as International makes like VW heavily rely on Mexico.
US car production will need to be flexible if these tariffs increase from 5% to 25%. Manufacturers operate complex cross-border supply chains. Many parts used in Mexican plants come from the United States and vise-versa. The US and Mexico Auto-Industry do not trade with each other. It is much more collaborative than that. The upshot will see increases to the US consumer when these goods come up for sale.
It’s not just the car industry
We could talk about higher prices at the pump. Household and commercial goods increases with electrical’s produced overseas. Food and the $28 billion imported from Mexico last year. Not to mention this disruption to US farming who sell $19 Billion back the other way. A double whammy for American wine producers who have seen Tariffs raised on their exports to the fast growing Chinese market.
Where will the war on trade end
You can see companies like Huawei hit hard in the short term. Car makers likewise will factor in costs when selecting new car production. A reduction in immigrants from Mexico is unlikely. Damaging job prospects in a country and weakening their economy has never worked as a driver to prevent migration. In the long term though it is more likely the consumer who will bear the brunt of this trade war.
From here in Europe “BREXIT” seems a much smaller issue when you watch what is happening in the USA.