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Tariff turmoil as trade tensions intensify

Informa Markets / Crain Communications

ICIS' Umberto Torresan, left, sees some worrying signs in Mexico related to the tariff environment.

As the U.S. intensifies its tariff measures — raising duties on steel and aluminium imports and targeting strategic sectors — Mexico finds itself at a critical juncture.

Despite protections under the USMCA, sectoral tariffs and foreign investment anxieties are prompting negotiations, industry lobbying, and contingency planning, especially within the automotive sector.

Urethanes Technology International Editor Steven Pacitti spoke with Umberto Torresan, senior business analyst for ICIS in the U.S., during the recent UTECH Las Américas show

Q: We're in the middle of a 90-day tariff pause, which does not affect Mexico. What is the current situation in Mexico and what can they expect to happen?

Torresan: I think the biggest consideration is that we have a 10 percent tariff now in general so that interests all the Latin American countries. But Mexico, especially, we must talk about the tariffs because even though the country is part of the U.S.-Mexico-Canada (USMCA) Agreement, there are some sectoral tariffs that supersede them and so Mexico must deal with automotive tariffs on one of the most crucial sectors in the economic development of the country.

The US administration just started a new tariff on steel and aluminum and put it to 50 percent on June 4. So that's what increases costs tremendously for a whole bunch of downstream construction, and a lot of other issues.

The interesting thing is that Trump is not new to tariffs, and we had a Trump 1.0 version. The difference between then and now is that now it's a lot worse, I think. And although some things happened during the first administration, they haven't happened yet. So, it's fingers crossed.

But, for example, during the first Trump administration we had a couple of big automotive companies like Ford and Fiat Chrysler, now part of Stellantis, because of the tariffs being threatened, the firms moved their production facilities from Mexico to Michigan in the U.S. It hasn't happened yet here, although we know that Nissan, for example, which produces about 300,000 vehicles in Mexico said that if there's no solution to this anytime soon, it might move to the US.

Q: That's an interesting point because to move certain manufacturing facilities might be possible, but in something like the automotive sector, how easy would it be to relocate manufacturing? Are we at the stage where the time it would take to relocate manufacturing and redefine supply chains would take us to the end of the current administration? I don't like the phrase 'wait-and-see' mentality but are they better off doing this? And are there things they can do to kind of offset some of the threats?

Torresan: Yeah, definitely. Moving production out of Mexico into the U.S. would be a huge cost to begin with. But there are some worrying signs related to the tariff environment. For example, there has been a decrease of foreign direct investment in Mexico during the first quarter of 21 percent due to preoccupation with the tariffs and the USMCA compliance program. So, working on these compliance problems, which the Mexican government is trying to do as we speak, is a good thing. There's also some lobbying that the different industries can do with their counterparts in the U.S. The automotive industry in Mexico is big and it has a direct relationship with the U.S., for example. So, these are all things that can happen to try and move the needle. And you know, Trump being Trump, he likes a good deal. So, if you're able to come up with a good deal, he might even change his way.

Q: Speaking of good deals, you mentioned the USMCA Agreement, which expires next year. So, is there a case for there being some sort of early renegotiation? Have you heard any suggestions that this might happen?

Torresan: The Mexican government wants to do an early review way before September next year. It might not be a full renegotiation, but it's an opportunity and this is happening at the highest diplomatic platform. I know that the Ministry of Economy in Mexico is interacting with the U.S. Department of Commerce as well as the U.S. Trade Commission and there is a very strong sense of urgency to solve these issues.

For example, another sign is Ciudad Juárez, which is a big manufacturing hub, which lost 40 percent of exports in the past month because of tariffs. So, there are signs that really motivate the Mexicans to try and smooth out as many issues as possible.

Q: You mentioned sectors that are impacted by the steel tariffs that have just come in. What sectors will feel the heat the most?

Torresan: Definitely automotive, because it's a sectoral tariff and it supersedes the USMCA, and the electronics industry. There's also the aerospace industry, which might be hit by upcoming tariffs, but that's why the Mexican government is trying to get ahead of these types of negotiations.

Q: When I speak to United Kingdom PU producers or suppliers, many say to me that, firstly, they are of the mindset that things could change, so, again they are reticent to do too much, and secondly, they feel that they're in a better position than their competitors across Europe. So, is there a case that in Mexico you have that greater level of protection in the USMCA than maybe their competitors in Asia?

Torresan: The USMCA is a protectionist mechanism and Mexico is protected by that, but there are some challenges versus other countries in Asia or South America. For example, there are rising labor costs in Mexico that partly stem from the minimum wage requirement of $16 an hour for North American products. Of course, Mexico has a competitive advantage from a regional standpoint as they are next to the U.S. market. Just belonging to the USMCA is a big advantage. Now the only thing that people would like to see is maybe a change in the sunset clause because the USMCA is supposed to shut down in 2036, and that's not good. When you look at foreign direct investment or investment in production facilities going forward in Mexico, if you're an investor, you really like the sense that there's going to be a continuation of this agreement, so that's going to be part of the conversation.

Q: You alluded to Trump 1.0 in 2016-17 and I guess in many respects we were in a very different place in the global economy back then. So, you know, it's a perfect storm really, with all these tariffs coming in. It's tightening the grip on companies in terms of their profit margins, so is there anything that Mexican PU producers can do to secure their profit margins? Should they be looking at expanding or adjusting their supply chains?

Torresan: There's a lot of things that they can do differently. Maybe differentiate suppliers based on different regions and create more redundancy in the supply network.

When you say creative nearshoring, I heard of a company that yesterday was offering in the U.S. to turn your factory into a free trade zone to avoid paying tariffs. So, there's all kind of creativity that happens there. Of course there is purchasing, you know pre-buying before tariffs. You can also look at the configuration of your product, or apply for the First Sale Rule, which has been around in the US for some decades and involves applying the tariff not on the price of a product arriving in a destination, but on the price of the product at its origin, so the tariff applied to that will be lower. There are all kinds of things that can be done financially, and companies can use digital assets to simulate tariff scenarios and figure out the top cost.

I talked to an automotive company in Mexico this month and they told me that they are thinking of including clauses on tariffs in their long-term contracts now.

* Source : https://www.plasticsnews.com/news/tariff-turmoil-trade-tensions-intensify

* Edit : HANDLER