50% Tariff Hike: A Heavy Toll on Chinese Firms in Mexico

In a surprising move, Mexico has announced yet another increase in its import tariffs, only a few months after a previous adjustmentPresident López has signed a decree to raise tariffs on a wide array of products including steel, aluminum, textiles, apparel, footwear, wood, plastics, chemicals, paper, ceramics, glass products, electrical materials, transportation equipment, and musical instruments, with the new tariffs ranging from 5% to a staggering 50%. This significant hike aims to protect local industries from what the government describes as unfair competition.

This decision follows Mexico's earlier increase in tariffs made on August 15, 2023, which affected steel, aluminum, and various other products with tariffs set between 5% and 25%. The latest adjustment appears to be a continuation of that policyInterestingly, the decree exempts countries that have Free Trade Agreements (FTAs) with Mexico, reflecting the longstanding issue of trade relations between Mexico and several other nations, notably China, Korea, and India, which currently lack such agreements.

According to Sun Lei, a senior partner at Dachen Trade Relief Law Firm, while the decree does not explicitly mention China, it indirectly impacts countries like China, Korea, and India due to the lack of an FTA with Mexico

This situation places additional economic pressure on companies importing raw materials to Mexico for production and exportHigher raw material costs could lead to a scenario where companies have to absorb losses, especially if they cannot raise prices to match the new cost of goods sold.

However, the implications of this tariff hike are nuancedCompanies that are part of the IMMEX program, which permits qualified foreign companies to import raw materials and components exempt from tariffs and taxes for manufacturing and subsequent export, may not feel the impact as severelyNonetheless, obtaining IMMEX certification can be a lengthy and complex process, presenting barriers for many businesses looking to take advantage of this exemption.

Li Meng, head of the Mexican and Central American studies at the China Institute of Contemporary International Relations, suggested that this move is part of Mexico's attempt to assert its position as the primary trade partner of the United States

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The recent tariff adjustments could negatively affect Chinese companies that have considered bypassing tensions with the U.Sby routing goods through Mexico to access the American marketDespite this, he noted that the theory of separating Mexico from China through "nearshoring" is unlikely to bear fruit for the U.S.

The Mexican Secretary of Economy, Raquel Buenrostro, clarified that the motivation behind the tariff hikes is to combat unfair competitionShe expressed concern about an influx of low-priced products from countries without an FTA with Mexico, which has been harming local manufacturers in various sectors, particularly textiles and footwearThe government’s intention is clear: to shield domestic producers from being undercut and to foster a more equitable trading environment.

Sun Lei elaborated on the government's rationale for raising tariffs, attributing it to the effects of global geopolitics, ongoing trade tensions, and a desire to bolster high-value industries within Mexico

Nevertheless, he pointed to the undeniable influence of the U.Sin Mexico's trade policy, particularly given that the U.Sis Mexico's largest trading partner and a significant force in the USMCA trade agreementThe U.Shas been critical of Mexico's steel exports and has previously threatened to reintroduction tariffs against Mexican goods should trade practices not align with U.Sexpectations.

Under increasing pressure from the U.S., Mexico may feel compelled to adopt such measures to avoid trade conflicts, particularly regarding the steel and aluminum marketsThis growth in imports has raised suspicions that Mexico is becoming a conduit for Chinese goods entering the U.Swithout appropriate tariffs, a situation that the U.Sgovernment is keen to address.

The fluctuations in tariff rates raise concerns among investors who are already grappling with the rapid changes in the global supply chain that started in 2018. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and USMCA have spurred many Chinese companies to invest in Mexico, yet the latest tariff hike could stifle this momentum, making Mexico a less appealing destination for investment.

Notably, uncertainties surrounding the cost of imported materials can deter investors, especially when faced with a dynamic political landscape that influences pricing stability

Sun Lei captured the essence of the problem, stating that predictability is crucial for business operationsIf businesses find it challenging to forecast costs due to fluctuating tariffs, confidence in making investments will dwindle.

Li Meng expanded on this sentiment, stating that continuous adjustments in tariffs could damage Mexico's credibility with trade partners and disrupt cooperative relationshipsHe also pointed out that rising raw material costs due to tariffs could result in higher consumer prices, which counteracts the benefits intended by the government through protective measures.

While the U.S.-Mexico-Canada Agreement did provide a framework for trade, Mexico still has to tread carefully to maintain its position and relationships within the North American trading sphereThe strategy seems increasingly focused on appeasing U.Sinterests and minimizing tariffs while maximizing exports to the U.S., particularly in the aftermath of increased scrutiny from American trade representatives.

In light of these tariff changes, Chinese enterprises could potentially circumvent some costs through the IMMEX program, which allows imports of materials without immediate tax liabilities, provided that all finished goods are exported within a specified timeframe