President Trump indicated last night, without adequate formal warning, that he intends to impose a 5 percent tariff on all imported goods from Mexico beginning on June 10.  NAFTA to USMCA

The action, according to the President, will gradually increase in five percent monthly increments, capping at a 25 percent level,  until such time as Mexico’s government stems the flow of undocumented immigrants flowing across the U.S. southern border.

To say the move is unprecedented would be an understatement, as are the significant implications to the existing multi-industry flows among North America based supply networks.

While tariffs have been commonly used to combat perceived trade imbalances or protections, utilizing such an action to coerce another country, one that is an ally, to bend to a domestic political agenda breaks new ground.

As general and business media have already echoed, such an across-the-board imposition of tariffs will likely ignite significant opposition among industry trade groups and individual businesses. Global equity markets are already responding to this development, slamming shares of automakers and other industries with significant supply chain links to and from Mexico.

The action, from our Supply Chain Matters lens, can only be characterized as extreme. Not only does it threaten to scuttle ratification of the recently negotiated United States-Mexico-Canada Trade Agreement (USMCA), the action places even more pressures on multi-industry supply networks already reeling with the ongoing effects of an escalating trade conflict between the United States and China.

Ironically, both the U.S. and Mexico’s trade teams earlier in the week had formally submitted USMCA for respective legislative ratification. Last year, Mexico exported a reported $346.5 billion of finished goods and intermediate components to the United States.

This morning’s banner headline from business network CNBC was that this latest action taken against Mexico may seriously undermine chances of a trade resolution with China. This banner report provides a sobering statement:

Trump’s 180-degree turn on the U.S.′ largest trading partner is sending an ominous message to the international community that he can’t be trusted, Wall Street policy analysts said, adding that China, already skeptical of Trump’s reliability, is now less likely to sign a trade deal with him.

The above statement should resonate with multi-industry supply chain management professionals who conduct constant negotiations- you need to be able to trust the actions and reliability of the other party. This very tenet, trusting the other party, indeed caused the final stage breakdown in the U.S. and China trade talks with the U.S. side accusing the China delegation of changing previously agreed to trade tenets that were put to writing.

The default scenario of this latest action, without a meeting of the minds, would in-essence be the sunsetting of the existing NAFTA trade agreement and reverting back to any existing tariff structures. It can be likened to  the equivalent of a no-deal Brexit scenario that could lead to delays of goods at U.S. borders and added disruptions for North America based supply chains.

 

Supply Chain Matters Perspective

Make no mistake, this latest development, without some form of rationalization has serious implications for global trade and for global based supply and customer demand networks. We have already highlighted the notions of actions concerning the cutoff of supply networks of Huawei Technologies and the weaponization of supply chains.  This latest development concerning the U.S. and Mexico spills into domestic immigration policy and consequent punitive trade actions.

From our lens, we are approaching unchartered waters related to the steadfastness of global materials movement.

 

Bob Ferrari

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