Daily Management Review

Trump Tariff Threat Makes Mexico Less Attractive As Alternative To China For Manufacturing


06/11/2019




The threats by the United States President Donald Trump of imposing tariffs on Mexico has curbed the enthusiasm for many companies that were looking at Mexico as an alternative following the trade war between the US and China.
 
The Mexican peso has been hit by the threat of tariffs and has also jeopardized the future of the new North American trade agreement which is set to replace the NAFTA already existing between the US, Mexico and Canada.
 
Last week trump threatened to impose tariffs on all products from Mexico – initially at 5 per cent and then rising to 25 per cent by October, over the issue of illegal migrants entering the US through its border with Mexico with Trump demanding that its Southern neighbor should do more to curb this flow of migrants primarily coming from Central American countries.
 
A large number of companies however were hopeful that the ratification of the North American trade agreement by the three countries would form the basis for turning Mexico into a lucrative manufacturing alternative to China. but the threat of tariffs has blown away that hope. 
 
According to reports, the outsourcing firm Tecma Group which manages some 75 factories in Mexico, has had a firsthand experience of this after Trump raised import tariffs on $200 billion worth of Chinese goods from 10 per cent to 25 per cent in May. The firm claims to have received many queries every week since then by companies manufacturing everything - from furniture to ink pens, about away to shift their [production base outside of China and possibly into Mexico, said Alan Russell, the chief executive and chairman of the firm.
 
However Russell said that those expression of interest from investors has now been put at risk after the Trump announcement of tariffs on Mexico. “A board of directors is not going to say, ‘Yeah let’s do this’ in the face of a 25% tariff,” Russell said.
 
While there is a lack of concrete data to suggest the number of companies seeking to get out of China and shift to Mexico, recent numbers that show that Mexico has emerged as the number one trading partner of the US as Chinese exports into the US falls, lends credence to the claims by the outsourcing firm.
 
Another example of how companies planning to set up factories in the Mexico have been hit by the Trump tariff threat is exhibited by the case of a plastic and paper making company called Fuling Global Inc according to one report. Earlier in April this year, the company had announced the construction of a manufacturing unit in the northern Mexican city of Monterrey and had then mentioned that the planned plant would “help reduce much of the impact of the China-U.S. trade changes.” That now appears to have been a wrong decision even though the company attempted to downplay the impact of the Trump tariff threat.
 
“Whatever we are doing in Mexico is for our company’s long-term strategic growth ... If we produce in Mexico we’ll a save a lot on freight and it will reduce the time for delivery. It’s a huge advantage,” said CFO of the company Gilbert Lee according to the report.
 
A similar motive was announced by camera maker GoPro Inc in early May for its strategy to shift its manufacturing unit for US-bound products from China to Mexico to “insulate us against possible tariffs,” according to its Chief Financial Officer Brian McGee at the time.
 
These are just small examples of companies that have been hit by the trump tariff threat and experts said that there are many more who are yet to come out in the open with their plans.
 
(Source:www.reuters.com)






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