Tariffs are the crux of the current trade war between the US and China. However, Mexico has also played an integral role in the discussion on tariff plans. Yesterday, President Trump indefinitely suspended a 5% tariff on Mexican imports and exports. As a result, Mexico had to agree to “stem the tide of migration 1.” Although the US and Mexico have reached an agreement to hold off tariffs, there is still a concern on how deeply the new tariffs will impact the economy. Also, it is important to keep in mind that US imports and exports exceed well over $240 billion, to and from Mexico.
Change In Consumer Spending Habits
Personal consumption expenses (PCE) are the most critical component of the US GDP. March and April differences from this year already show an increase in inflation, which ultimately results in a decrease in consumer spending. US consumers purchase many imported products from China and Mexico (both heavily involved in the current trade dispute). Since tariff negotiations are still on unstable ground, we are poised to likely see a slowdown in the US economy.
Impact for the Automobile Industry
Before the suspension of the 5% tariff, the increased cost on Mexican goods would have caused American households to spend an additional $900 annually. Also, over 400,000 Americans were in jeopardy of losing their jobs 2– especially anyone employed in the automobile industry. Mexico is the US’s largest trading partner, due in large part to automobile manufacturing. If tariffs in Mexico happen, the cost of vehicle manufacturing will increase. Subsequently, consumers will inherit any inflated vehicle costs from auto dealers.
New Trade Alliances
The US hasn’t seen signs of a recession just yet. However, there are strained alliances between some of the country’s most dominate partners. For instance, tariffs have already risen to 25% for $250 for Chinese imports 3. Now, we could see a trend with new trade partners that depends less on the value of the dollar.
Although the tariffs in Mexico have come to a halt, there is still speculation surrounding current trade alliances. Confidence is lessened in the future of the North American Free Trade Agreement (Nafta) with the US, Canada, and Mexico. For this reason, Germany is currently under consideration for tariffs. As a result, BMW (a German manufacturer) could be forced to move more of their manufacturing processes to Poland or Mexico. Time will tell just how severe and widespread the impact of tariffs will be for manufacturers and the US supply chain.
1 Trump Cancels Mexico Tariffs by Charles Wallace
2 Mexico Staves Off Trump Tariffs With Last-Minute Deal by Llisette Voytko
3 Tariffs 101: Understanding Trump’s Trade War by Kenneth Rapoza