Mexico might be the shortcut exporters need to bypass US tariffs

Mint

2 days ago

T. K. Arun A 90-day window to cut a special deal has made Mexico a hot prospect for global exporters seeking to dodge steep Trump tariffs, without moving operations to the US. Trucks queue near the Mexico-US border before crossing the border. US President Donald Trump said he would hold off a planned tariff hike on Mexican products and instead keep duties at existing levels for 90 days. (File Photo: AFP)
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The world is watching Mexico, not because of the 5.7 magnitude earthquake that has struck its Oaxaca region, or the prison riots in Veracruz that have claimed several lives. Such disturbances are not uncommon in the region. Instead, global attention is fixed on Mexico because it alone has secured a 90-day window to finalize tariff terms with the US, even after the 1 August deadline has expired.
The world is watching Mexico, not because of the 5.7 magnitude earthquake that has struck its Oaxaca region, or the prison riots in Veracruz that have claimed several lives. Such disturbances are not uncommon in the region. Instead, global attention is fixed on Mexico because it alone has secured a 90-day window to finalize tariff terms with the US, even after the 1 August deadline has expired.
This rare grace period is significant: it will delay investment decisions in many countries that export to the US and stall tariff-jumping investments into the US itself. Investors are in wait-and-watch mode. Also Read | Trump vows higher tariffs, India responds
At present, Mexican exports of steel and copper to the US are subject to a 50% duty, just like similar imports from elsewhere. Automobiles and goods that are not compliant with the US-Mexico-Canada Agreement (USMCA) face a 25% tariff. In contrast, goods that meet USMCA requirements attract low or zero tariffs. For compliance, at least 75% of the value of the good must originate in the region covered by the agreement.
To prevent someone from importing a good into Mexico at, say, $25 and then exporting it to the US at a marked-up value of $100—technically satisfying the 75% value-add requirement—the USMCA also demands substantial transformation of the good. This means the finished product must fall under a different customs classification from the imported input.
If the US, at the end of this 90-day window, agrees to impose an import duty of just 5% (or even 10%) on non-USMCA-compliant imports from Mexico, it would create a compelling incentive for exporters from high-tariff countries to set up plants in Mexico rather than within the US, to bypass steep duties.
Consider pineapples. Under the Harmonized System of Nomenclature (HSN), fresh pineapples are coded 08043000, while canned pineapple is classified as 20082000. Costa Rica, the world's largest exporter of pineapples, currently faces a 15% US import duty. But if Mexico secures a deal for a 5-10% tariff, a Costa Rican firm, or any other, could set up a canning plant in Mexico. Fresh pineapples could be imported, peeled, sliced, and canned there, then exported to the US.
Because the canned product has a different HSN code, this fulfils the second condition to qualify as USMCA-compliant. Depending on the value added in Mexico, the canned pineapple may qualify to be exported on USMCA terms. If so, the product would be virtually tariff-free. Even if it doesn't qualify, it would still benefit from the lower Mexican rate. Also Read | Trump tariffs: Is the world watching globalization fall apart?
In trade economics, when a domestic market is large enough, a country can raise tariff barriers to force foreign producers to invest locally in order to access that market—this is called tariff-jumping. But if nearly the same benefit can be gained by investing in a nearby lower-cost country with a concessional duty regime, companies might prefer that route. They get access to the target market while saving on labour and operating costs.
Switzerland, for instance, faces a 39% tariff, the highest in Europe. It's a major exporter of optical, technical, and medical equipment to the US. If its attempts to negotiate a better deal by offering to invest heavily in the US fall through, it may have to shift production to North America. If Mexico secures a favourable tariff deal, Swiss firms would likely prefer producing in Mexico over the higher-cost US.
Similarly, if Donald Trump withdraws the current exemption on pharmaceuticals and starts applying country-specific duties rather than sector-specific ones, Indian pharmaceutical companies may also find it worthwhile to relocate some US-focused production to Mexico.
That gives Mexico a major incentive to offer Washington concessions in return for a favourable tariff agreement. If it succeeds, it stands to attract a wave of foreign investment aimed at the US market.
For now, the uncertainty holds everything up. Some exporters might decide to absorb the tariffs and lose share in the US. Others may be ready to relocate production to North America, but can't act until Mexico's deal is finalized. If Mexico doesn't secure a concessional tariff, some of those investments may flow directly into the US instead.
So Mexico today is far more relevant than just for its Aztec and Mayan heritage, the cocoa that France turned into chocolate, the Mexican wave at football matches, or even the Coco Bongo nightclub in Cancún.
Time to raise a glass of tequila, and perhaps send a delegation led by Shashi Tharoor to Tenochtitlan, or Mexico City, as it's now known?
Views expressed are personal. Topics You May Be Interested In