As Trade War Spreads to Mexico, Companies Lose a Safe Harbor

When trade tensions with China flared last year, many companies sought refuge in a country with a long, stable relationship with the United States: Mexico.

Now, that alternative for production and materials may also be in jeopardy with President Trump’s threat to impose escalating tariffs on imports from Mexico, aimed at forcing action on illegal immigration.

In the short term, the tariffs would mean lower profits for American importers and higher prices for American consumers on everything from avocados to Volkswagens. In the long run, they could force companies to reconsider the continent-spanning supply chains that have made North America one of the world’s most interconnected economies. That disruption, experts warn, could be far more damaging to the United States economy than the cost of tariffs themselves.

The United States imported more than $345 billion in goods from Mexico last year, and shipped $265 billion the other way. But if anything, those numbers understate the interdependence. American refiners process crude oil from Mexico, then sell it back as gasoline. Automakers ship parts back and forth repeatedly during manufacturing. About 30 percent of the content of Mexican exports originated in the United States, according to a recent study.

“Our ties to Mexico are in many ways much more immediate than China and in some ways much more powerful,” said Pete Guarraia, who leads supply chain consulting for Bain. “I don’t think there’s much you could do to mitigate the effects because the changes required would be so substantial.”

Mr. Trump has frequently criticized Mexico and the American companies that relocate production there. But his trade policies have largely focused on China, a target of successive rounds of tariffs on billions of dollars in imports.

American companies have responded by moving production and supply chains out of China, in some cases to Mexico, which so far this year has displaced China as the United States’ top trading partner. The attraction of doing so only increased when the United States, Mexico and Canada reached a deal last fall to replace the North American Free Trade Agreement.

Now, those plans have been thrown into turmoil.

“Mexico was the place that people were looking to move to,” said Joseph Fitzgerald, a partner in Deloitte’s supply-chain practice. “Now it’s, ‘Gosh, we just got through one wave of supply chain strategy and structural change and now we need to start a new round.’”

Mr. Trump said in a Twitter post on Thursday evening that he would impose a 5 percent tariff on Mexican imports on June 10, and ratchet it up to 25 percent by October if the immigration issues were not resolved. If the tariffs materialize, consumers could feel them almost immediately, most likely starting with the price of fresh fruits and vegetables — a competitive market with slim margins where distributors would have little choice but to pass on costs.

“As a consumer, that was my first thought,” said Emily Blanchard, an economist at the Tuck School of Business at Dartmouth College. “Those are my avocados and strawberries. What are you doing?”

For other products, the reverberations could be more gradual. Companies may initially absorb some of the costs to avoid losing business, particularly on higher-margin items, or ones where they face competition from domestic producers. But economic research shows that consumers eventually bear the brunt of tariffs. The impact could be greater in the case of trade with Mexico because so many imports from there contain parts or materials from American factories.

“We’re taxing ourselves on our own goods,” said Katheryn Russ, an economist at the University of California, Davis.

Economists said the direct effects of a tariff of 5 percent or even 10 percent would probably be small, especially with a strong economy and low inflation. The larger threat, they said, was the disruption they could cause for automakers and others who have come to rely on supply chains that seamlessly cross international boundaries. Those supply chains will not fray overnight, said Brian Dunch, a trade expert at PricewaterhouseCoopers. But over time, they could break down, particularly if companies decide they cannot trust trade rules to be consistent from one year to the next.

“It’s the cumulative effect of all this uncertainty,” Mr. Dunch said. “You’ll see supply chains Balkanize.”

No industry better symbolizes the integrated North American economy than the automakers. And no industry stands to lose more if that integration breaks down.

General Motors has three Mexican plants that make some of its most important models, including the highly profitable Silverado and Sierra pickup trucks and the new Chevrolet Blazer sport-utility vehicle. G.M. and Fiat Chrysler rely on Mexico for about a quarter of their North American production, and Ford for 10 percent. Some foreign automakers are even more reliant on Mexico. Volkswagen, for example, makes Golfs and Jettas there for the United States market, and almost half of the cars Nissan makes in North America are built in Mexico.

Tariffs could also disrupt production in some auto plants north of the border because manufacturers operate complex cross-border supply chains. Many parts and components used in Mexican plants come from the United States, and vice versa.

“It’s safe to say that in terms of auto manufacturing, the U.S. and Mexico are not trading with each other so much as they are building the same products together,” said Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research in Ann Arbor, Mich.

Tariffs, “would significantly raise the cost of building cars in the U.S. and burden supply chains that have been built up over decades,” she said. “The industry doesn’t have piles of cash laying around to build up new production capacity in the United States.” NEAL E. BOUDETTE

Tariffs could also mean higher prices at the pump.

Imports of Mexican oil have been in decline in recent years, but the United States still purchases more than 700,000 barrels of crude a day from Mexico, 8 percent of total imports. A 5 percent tariff would add $3 a barrel — a cost that experts said were likely to be passed on to consumers in prices for gasoline, diesel and jet fuel.

“It’s the American driver who is going to suffer the consequences,” said Bruce S. Appelbaum, chairman of Mosaic Resources, a Houston consulting firm serving oil and gas investors.

Tariffs would pose a particular challenge for American refineries on the Gulf Coast that have been tooled to process heavy crude from Mexico, Venezuela and Canada. Adding to the challenge: Venezuelan oil imports have been shut off by Trump administration sanctions.

Mexico buys more than a million barrels of American petroleum products a day, providing as much as $20 billion in revenue to American-based energy companies annually. Those sales could be threatened if Mexico retaliates with its own tariffs, although doing so would be costly: Mexico benefits from the low cost of American energy products.

The natural gas trade will also be affected. About 20 pipelines send up to 5 billion cubic feet of American gas a day to Mexico, with more flowing in liquefied form by tanker. A shortfall in gas sales to Mexico would depress gas prices, but it could also mean a slowdown in pipeline construction and the loss of construction jobs.

“This is a symbiotic relationship he is throwing a monkey wrench at,” Steven Pruett, chief executive of Elevation Resources, a West Texas oil company, said of Mr. Trump. “It’s very disruptive to business and planning.” CLIFFORD KRAUSS

The United States imported nearly $28 billion in food and drink from Mexico last year, including more than two-fifths of its total imports of fruits and vegetables. Tariffs on those goods are likely to show up in higher prices in produce sections and grocery shelves within weeks.

American farmers, meanwhile, face the risk of retaliatory tariffs from Mexico — again. It was just two weeks ago that Mexico and Canada agreed to lift tariffs on American agricultural products that they had imposed in response to the administration’s tariffs on steel and aluminum imports. Now American farmers are facing the prospect of a renewed trade war.

“It’s very disappointing because we just got the tariffs removed,” said Michael Nepveux, an economist at the American Farm Bureau Federation, “so it’s very concerning to see things heading in the direction that they’re heading.”

President Andrés Manuel López Obrador of Mexico has so far demurred on pushing the confrontation further. But the possibility of retaliation remains, and any Mexican tariffs could be damaging.

Agricultural and food exports to Mexico totaled $19 billion in 2018, according to the United States Department of Agriculture. Of the top five exports — which include corn, soybeans, beef and dairy products — pork and pork products were most affected by the previous round of Mexico’s retaliatory efforts. During the first quarter of this year, for example, pork exports across the southern border dropped by $109 million, compared with the same three-month period in 2018.

“This is hitting agriculture once again at a very vulnerable time,” said Todd Hultman, a lead analyst at DTN, an agriculture news and data service. China, for example, the largest buyer of American soybeans, has virtually halted purchases amid heightening tensions. PATRICIA COHEN

Mr. Trump’s tariff announcement sent a jolt through medical device makers, which in recent years have built facilities in places like Tijuana that produce items like pacemakers, artificial respirators and intravenous bags. Last year, the United States imported medical equipment from Mexico worth nearly $8 billion, according to government trade statistics.

Blair Childs, a senior vice president for public affairs at Premier, a company that buys supplies for hospitals and other health care providers, said many medical items were kept off the list of products that were subject to the first set of tariffs on imports from China. But now the list of Chinese products is expanding, meaning medical products from both China and Mexico could be hit with new levies.

“We’ve been scrambling to try and figure out what might this mean,” Mr. Childs said. “We’re completely focused on trying to avoid price increases.” PETER EAVIS

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