A Year Later, Mexico’s Retaliatory Tariffs Harm U.S. Manufacturers

By March 10, 2010Economy, Trade

Today we mark the anniversary of the imposition of retaliatory tariffs on a wide range of U.S. manufactured exports to Mexico. As a result of Congress yanking funding for a pilot program to demonstrate the safety of Mexican trucks operating in the United States –- and the program’s interim report showed they’re just as safe as U.S. trucks — $2.4 billion worth of U.S. exports to Mexico, ranging from grapes to dog food to refrigerators, have spent the last year facing high tariffs that have priced them far above similar products sold in Mexico by our competitors around the world.

This may not seem like an enormous issue, in the grand scheme of things, but it is real jobs that have been lost, real communities that in some cases have lost the major employer, and it is small and medium manufacturers (SMMs) who have been hit hard in particular. Over 95 percent of the firms that export to NAFTA are SMMs, and for many of them, loss of Mexico as an export market could be the difference between viability and closing up shop.

The National Association of Manufacturers has studied the impact of these tariffs, and found that about 16,000 U.S. manufacturing jobs have either been lost or are at risk of being lost as a result of their levy. Sixty-five percent of the targeted items are manufactured goods, including chemicals, paper and printed materials, household and personal care products, machinery, and processed food products.

There are three ways you can deal with these tariffs, and we’ve seen manufacturing in America try all three. You can shut down your U.S. production and move it to Mexico, Canada, or another country. That has happened. You can try and stick your Mexican distributors with the cost of the tariff. You can try to do that, but in many cases they’re just finding new suppliers from other countries, and the U.S. market share is dropping. Or, you can eat the tariffs as part of your cost of business. Adding a 20 percent tariff to your costs to try and preserve market share is, at best, a short-term solution that leads to loss of profits. Do it long enough, and you’ll be searching for alternate production lines in countries where they don’t face tariff retaliation. This takes the pain from the bottom line to the unemployment line, and it’s something many U.S. companies – after an entire year of facing such tariffs – are beginning to do. The situation is only going to grow worse in the coming months.

Obama Administration officials have in recent weeks made good comments about moving to solve the underlying issue of access for trucks that would end these tariffs, but it has been a year and there has been no tangible movement on any possible fix. Given the current economic climate, it seems foolish to put any American jobs at risk unnecessarily. The President has spoken of wanting to double exports within five years – one of the ways to do this, in addition to passing the three pending free trade agreements with Colombia, Panama and Korea, is to remove these Mexican tariffs. The President has also spoken of wanting to be sure that the United States enforces our trade laws. Part of enforcing our trade rules means complying with other nations enforcement of theirs, and to ignore resolution of the Mexican trucking issue for a year does not provide a particularly good example to other nations.

Mexican trucks would be required to meet U.S. safety standards, U.S. emissions requirements, and the drivers would be mandated to follow the same rules as U.S. truckers. We are not letting unsafe trucks or unsafe drivers into the United States as a result of complying with our original 1993 NAFTA commitment to open borders. The dispute panel that awarded Mexico these retaliatory tariffs in 1999 indicated the U.S. could impose stricter rules on entry of Mexican trucks.

The longer these tariffs stay in place, the further behind our exports to Mexico will fall, the more market share our companies will lose to competitors around the world, and more jobs will be lost. Driving production out of the United States to Mexico or Canada (or China) is not anyone’s idea of a good policy. Adding workers to unemployment rolls, hurting American competitiveness – these are not things we should set out to do, let alone leave untouched for a year.

Reuters has a good story summarizing the impact that these tariffs have had so far.

Here’s some brief background (from Congressional Research Service report RL31738) on how this came to be:

NAFTA set forth a schedule for implementing its trucking provisions that would have opened all of North America to cross-border trucking competition in 2000, but full implementation has been stalled because of concern with the safety of Mexican trucks. In 1998 Mexico protested the postponement of NAFTA trucking provisions under NAFTA dispute settlement procedures. The final report of the arbitration panel concluded that the blanket refusal to process the applications of Mexican motor carriers was in breach of the NAFTA obligations of the United States and that alleged deficiencies in Mexico’s regulation of commercial trucking did not relieve the United States of its treaty obligations. Mexico was given the right to retaliate, but did not do so at the time.

In November 2002, the U.S. Department of Transportation announced that all the preconditions had been met and began processing Mexican applications for U.S. long-haul authority. In February 2007, the U.S. and Mexican Secretaries of Transportation announced a demonstration project to implement the NAFTA trucking provisions. The purpose of the project was to demonstrate the ability of Mexico-based motor carriers to operate safely in the United States beyond the border commercial zones. After failing to defund the demonstration project in the FY2008 appropriations process, Congress succeeded in terminating the demonstration project through a provision in the FY2009 appropriations process – and Mexico announced it would retaliate by increasing import duties on 90 U.S. products.

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