Even as the U.S. Surplus in Steel Trade With Mexico Widens, USTR Threatens Tariffs On Feb. 16, Katherine Tai, the U.S. Trade Representative (USTR), met virtually with Raquel Buenrostro, Mexico’s Secretary of Economy. According to the official readout of the meeting by the Office of the USTR, “Ambassador Tai stressed the urgent need for Mexico to take immediate and meaningful steps to address the ongoing surge of Mexican steel and aluminum exports to the United States and the lack of transparency regarding Mexico’s steel and aluminum imports from third countries.” The readout went on: Noting that U.S. consultations with Mexico on this matter have been ongoing for over a year, Ambassador Tai emphasized that the 2019 Joint Statement on the Section 232 Duties on Steel and Aluminum allows for the reimposition of Section 232 tariffs. Conversations between both countries will remain ongoing. Steel experts were baffled by the content and tone of Tai’s accusation and threat. According to an Excelsior report by the respected business analyst Alicia Salgado, Minister Buenrostro responded that “the steel industry in the United States faces a competitiveness problem, and the way they want to solve it is by threatening to increase 25% tariffs on steel.” Salgado wrote that Buenrostro rejected “threats of tariff increases.” The competitiveness deficiencies, say industry observers, are centered in smaller, less efficient U.S. steel manufacturers. Without a full view of the steel trade landscape, they have apparently been pressuring their members of Congress to pressure USTR, in turn. In fact, Mexico and the U.S. have been cooperating to build shorter and more stable supply chains as COVID-19 and geopolitics have proven China and other sources to be unreliable. Mexico has also worked the U.S. in building a detection and reporting system to trace transshipments (see below). The North American value chain in steel has provided the U.S. with many benefits, including a trade surplus and domestic job creation. Mexican steel production complements U.S. production, filling gaps and creating more choices for industrial customers. The USTR readout also runs counter to recent positive comments by U.S. Treasury Secretary Janet Yellen and her Mexican counterparts. And the readout runs counter to the facts….
Mexico, of course, is a smaller market than the U.S., so the impact of U.S. imports is far greater in that country. In 2023, CANACERO reports….
Mexican Cooperation With the U.S. on Detecting Transshipments It’s safe to say that, while Mexico may retaliate if the U.S. re-imposes Section 232 duties, Mexico has no desire for a trade war with the United States over steel. As this newsletter pointed out in December: “The U.S. and Mexico have a common cause in ensuring that Chinese and other international firms – especially those provided by their governments with subsidies and other benefits – do not exploit Mexico’s favored North American tariff position to circumvent trade laws. Concerns extend beyond the written regulations alone to matters of strict compliance with rules of origin.” There is no doubt that Mexico needs to be sensitive to U.S. concerns in its own policy making and enforcement, with both nations working in complementary fashion. So far, Mexico has indeed worked hard to cooperate, respecting the terms of the Joint Agreement, which calls for Mexico to “prevent the transshipment of aluminum and steel made outside of the U.S. to the other country.” The agreement also states: “The United States and Mexico will establish an agreed-upon process for monitoring aluminum and steel trade between them.” An objective observer would probably say that Mexico has gone above and beyond the agreement. Mexican President Andres Lopez Obrador on Aug. 15 imposed 25% tariffs on steel imported from countries with which Mexico does not have a free trade agreement. Those tariffs match the Section 232 duties with the intention of preventing China and other large manufacturing nations like Turkey and South Korea from transshipping excess steel without tariffs to Mexico, making minor upgrades, and then sending it across the border, tariff-free. This tariff measure strikes a blow against an activity that harms the U.S. and Mexican steel industries. In response to the Mexican action, a spokesperson for the Ambassador Tai stated, “The United States welcomes Mexico’s efforts to address global non-market excess capacity in the steel sector.” Mexico has also cooperated with the U.S. on a test project for a new interoperable system which, among other functions, can identify the foreign source of steel products imported from Mexico to the U.S. As the Feb. 18 statement by CANACERO states: “The Mexican steel industry has completed the first phase of the pilot program with the company Transmute, endorsed by CPB [U.S. Customs and Border Protection] to establish traceability mechanisms to the origin of steel that allow verifying the authenticity of the origin of imported products.” Yellen Praises Mexican Efforts to Secure North American Supply Chains One U.S. official who clearly understands the value of Mexico in securing supply chains and helping the U.S. economy thrive is U.S. Treasury Secretary Janet Yellen herself. As we noted in a previous newsletter, late last year she traveled to Mexico for discussions with government officials, including Secretary of Finance and Public Credit Rogello Ramirez de la O, and on Dec. 7 concluded an agreement to monitor foreign investments and share information about screening them. She said in a prepared statement: We will…continue supporting the creation of reliable, secure supply chains that span the United States and Mexico and benefit both our economies through actions to protect our national security in critical industries. I am pleased to announce that the United States and Mexico have today signed a Memorandum of Intent that reaffirms our joint commitment to counter the threat certain foreign investments pose to our national security and establishes a bilateral working group to exchange technical knowledge and best practices. The U.S and Mexico “benefit when they work together to guard against foreign investments that pose national security risks,” Yellen said. In a separate statement after meeting with private-sector executives, she said: “Exports to Mexico, from electrical machinery to plastics, benefit American workers and firms by supporting more than one million American jobs. American manufacturers and consumers gain from significant imports, including of automobile parts, glass, iron, and steel. And Mexican companies are investing in production in the United States.” It is this symbiotic relationship that must be maintained. Threats from leading public officials rarely help. These materials are distributed by Glassman Enterprises, LLC, on behalf of Grupo Deacero, S.A. de C.V. Additional information is available at the Department of Justice, Washington, D.C.
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The Boom in Chinese Investment in Mexico:
Benefits and Red Flags Considerable media and political attention has lately focused on China’s increased manufacturing presence in Mexico. This burgeoning investment is a natural consequence of near-shoring – widely seen as a beneficial development because shorter supply chains to the U.S. are more reliable and resilient and often less costly to producers and ultimately to consumers. Investment in Mexico also helps that nation boost employment and economic growth, providing better lives for its citizens and decreasing immigration pressure. Gross domestic product in Mexico has risen 3.2% in 2023, one of the fastest rates in the world. Earlier this year, Peter S. Goodman of the New York Times wrote that “scores of major Chinese companies are investing aggressively in Mexico…. Chinese firms are establishing factories that allow them to label their goods ‘Made in Mexico,’ then trucking their products into the United States duty-free.” He gave the example of a Chinese furniture maker called Man Wah spending $300 million on a factory in Nuevo Leon and added, “The participation of Chinese companies in this shift attests to the deepening assumption that the breach dividing the United States and China will be an enduring feature of the next phase of globalization.” On Nov. 23, an article in The Economist stated: Chinese investments have been pouring into Mexico lately. Last month alone brought two notable ones. The government of Nuevo León… announced that China’s Lingong Machinery Group, which makes diggers and other construction equipment, would build a factory that it estimates will generate $5bn dollars in investment. The same day Trina Solar, a solar-panel manufacturer, said it would invest up to $1bn in the state. The Coalition for a Prosperous America (CPA), an association of U.S. manufacturers and other producers, reported that foreign direct investment (FDI) by Chinese firms in Mexico increased 276% over the past five years. But creating a platform in Mexico for Chinese companies to ship certain goods to the United States also raises red flags. As the CPA puts it, “Chinese investment in the Mexican economy raises the likelihood of transshipment of goods labeled ‘Made in Mexico’ that are entirely or primarily ‘Made in China.’” In an example of this kind of transshipment, the U.S. Department of Commerce (DoC) last December found that Chinese companies were manufacturing solar panel components in China and “then sending those cells and modules to Cambodia, Malaysia, Thailand, and/or Vietnam for minor processing before being exported to the United States. Such actions amount to an effort to evade the existing antidumping duty (AD) and countervailing duty (CVD) orders on solar cells and modules from the PRC [People’s Republic of China].” These practices, said the DoC, “undermine American industries.” One damaging consequence is that, if Mexico is used for transshipment, a U.S. political response could jeopardize North American free trade, as codified in the USMCA and special tariff exemptions. The Current Tariff Regime and Attempts to Evade It Under the terms of the USMCA, a plant in Mexico -- whoever owns it -- can export products to the U.S. free of tariffs. A similar plant in China is likely to be subject to tariffs under Section 301 of Title III of the Trade Act of 1974. Those tariffs were imposed by the Trump Administration in 2018 after the U.S. Trade Representative (USTR) determined that “China’s acts, policies and practices related to technology transfer, intellectual property and innovation were unreasonable or discriminatory and burdened or restricted U.S. commerce.” The Section 301 tariffs apply to about two-thirds of China’s exports to the United States. The tariff on Chinese auto exports under 301 was set at 25%. Also in 2018, President Trump imposed tariffs of 25% on exports of steel from China and nearly all other nations to the U.S. under Section 232 of the Trade Expansion Act of 1962, which is meant to protect national security. In 2019, Mexico and Canada were exempted from those tariffs. After the Biden Administration came into office, the tariffs were changed to tariff-rate quotas for the European Union and Japan. Under the USMCA, to avoid tariffs, 75% of a vehicle has to be built in North America and 70% of its steel and aluminum have to be sourced from the region. In addition, the Inflation Reduction Act of 2022 (IRA) “allows certain electric vehicles and batteries made in North America to qualify for the full $7,500 federal tax credit, a lifeline for Mexico's auto production, as some U.S. car companies already produced or planned to produce EVs south of the border.” As we previously reported in our newsletter, Mexico has taken steps to deter Chinese circumvention of the content rules. President Andres Lopez Obrador on Aug. 15 imposed 25% tariffs on steel imported from countries such as China with which Mexico does not have a free trade agreement. Those tariffs match the Section 232 duties. The intent is to discourage China and other large manufacturing nations like Turkey and South Korea from transshipping excess steel without tariffs to Mexico, making minor upgrades, and then sending it across the border, tariff-free. The transshipment of steel products from China and other countries through Mexico to the U.S. has been a major concern of the Biden Administration in its campaign against global overproduction, and the new Mexican tariff measure strikes a blow against an activity that harms the U.S. and Mexican steel industries. In response to the Mexican action, a spokesperson for the U.S. Trade Representative stated, “The United States welcomes Mexico’s efforts to address global non-market excess capacity in the steel sector.” Mexico has also cooperated with the U.S. on a test project for a new interoperable system which, among other functions, can identify the foreign origin components of steel products imported from Mexico to the U.S. These are powerful efforts to ensure compliance with rules to prevent transshipments that tries to circumvent rules of origin. ‘Alarming Some Lawmakers Across the Border’ Despite these measures, The Economist warned that “a growing Chinese presence in Mexico could backfire if it raises tensions with the United States. Most Chinese manufacturing and assembly in Mexico seems to be aimed at exports,…especially to America. This is alarming some lawmakers across the border.” In a Nov. 7 letter to USTR Katherine Tai, Rep. Mike Gallagher (R-Wis), the chairman of the Select Committee on the Communist Party, and the ranking member of that panel, Rep. Raja Krishnamoorthi (D-Ill), as well as two committee members from Michigan, Reps. John Moolenaar (R) and Haley Stevens (D), wrote, “We are concerned by how the People’s Republic of China (PRC) is preparing to flood the United States and global markets with automobiles, particularly electric vehicles (EV), propped up by massive subsidies.” The House members called for the 25% tariffs on vehicles exported from the PRC to “not only be maintained but also increased,” but the letter also argued that Section 301 “tariffs on vehicles from the PRC alone will not solve the problem, as the PRC seeks to circumvent tariffs through a variety of means, including transshipment and overseas production in third countries.” The letter continued: “The United States must also be prepared to address the coming wave of PRC vehicles that will be exported from our trading partners, such as Mexico, as PRC automakers look to strategically establish operations outside of the PRC to take advantage of preferential access to the U.S. market through our free trade agreements and circumvent any PRC-specific tariffs.” Then, the letter stated in boldface, with underlining: We look forward to USTR’s response on whether the current rules of origin in our trade agreements need to be strengthened and what other policy tools are needed to prevent the PRC from gaining a backdoor to the U.S. market through our key trading partners. A sensible approach, say lawmakers, is a careful analysis of whether current rules of origin provide adequate protection and, if not, what needs to be done to strengthen them. The letter urges that the U.S. not “once again stumble into a critical dependency on the PRC,” which uses “massive subsidies and other market-distorting measures.” Yellen Lauds U.S.-Mexico Bilateral Economic Relationship and Announces Agreement to Monitor Chinese Investments U.S. Treasury Secretary Janet Yellen met with Mexican private sector executives in Mexico City on Dec. 6 “to hear firsthand about the opportunities they see for greater integration.” Her official remarks began by emphasizing the importance of the U.S.-Mexico bilateral economic relationship: Our two economies don’t just sit side by side; they are deeply intertwined. Bilateral trade with Mexico reached over $850 billion in 2022 and Mexico became America’s largest goods trading partner this year. Exports to Mexico, from electrical machinery to plastics, benefit American workers and firms by supporting more than one million American jobs. American manufacturers and consumers gain from significant imports, including of automobile parts, glass, iron, and steel. And Mexican companies are investing in production in the United States. But, as further evidence of U.S. concern over Chinese capital flowing into Mexico, she also had discussions with Mexican government officials, including Secretary of Finance and Public Credit Rogelio Ramírez de la O, and on Dec. 7 concluded an agreement to monitor foreign investments and share information about screening them. She said in a prepared statement: We will…continue supporting the creation of reliable, secure supply chains that span the United States and Mexico and benefit both our economies through actions to protect our national security in critical industries. I am pleased to announce that the United States and Mexico have today signed a Memorandum of Intent that reaffirms our joint commitment to counter the threat certain foreign investments pose to our national security and establishes a bilateral working group to exchange technical knowledge and best practices. Like our own investment screening regime, CFIUS, increased engagement with Mexico will help maintain an open investment climate while monitoring and addressing security risks, making both our countries safer. The U.S and Mexico “benefit when they work together to guard against foreign investments that pose national security risks,” Yellen said. According to an Associated Press report, “The U.S. wants to prevent Chinese purchases of sensitive American technology that could be accessed through other U.S. trading partners. The U.S.-Mexico agreement may help achieve that goal.” Questions About Who Will Own the Largest Steel Plant in Mexico These concerns will likely be heightened as more information emerges about the possibility of PRC or other Asian investment in the largest steel plant in Mexico by installed capacity. It has been reported that Chinese interests are partners in a group close to purchasing Altos Hornos de México (AHMSA), which at one time employed 14,000 workers in the city of Monclova, in the state of Coahuila, 155 miles from the U.S. border. AHMSA’s principal owner was Alonso Ancira, a colorful figure who was arrested but later freed in a celebrated corruption case. According to the U.S. International Trade Commission (ITC), AHMSA owes suppliers $650 million. Its balance sheet shows $900 million in negative equity. Earlier this year, the ITC reported that AHMSA was acquired by Argentem Creek Partners, an investment firm founded by Daniel Chapman, who formerly ran the hedge fund business at Cargill, the agribusiness giant. Cargill is one of AHMSA’s largest creditors through a $575 million financing deal in 2019. In August, Steel Orbis reported that Ancira had given an interview to a radio station in Texas, in which he said Argentem is in charge of bringing together investors to buy AHMSA in a $1 billion deal. Investors, said Ancira, are “financial company Cargill Capital, Texas investors [a Native American tribe] and Chinese investors.” “The Chinese are experts in this area,” Ancira said. Steel Orbis explained, “From this, it could be deduced that it will be the Chinese who will be the ones who will lead the integrated Mexican steel giant.” (Based on his past performance, Ancira is not necessarily a highly reliable source.) On Nov. 23, as Steel Orbis reported, “managers, technicians and financiers of the Asian company China Steel Corporation (CSC) visited the facilities of the paralyzed steel mill,” AHMSA. CSC is not a PRC company. It is based in Taiwan, which, like China, is subject to the 25% tariffs on steel under Section 232. At this point, it is unclear which investors – if any – will take over AHSMA. What is certain is that U.S. elected officials will be following the saga closely. Common Cause for the U.S. and Mexico in a Fair and Functioning Regional Trade System The U.S. and Mexico have a common cause in ensuring that Chinese and other international firms – especially those provided by their governments with subsidies and other benefits -- do not exploit Mexico’s favored North American tariff position to circumvent trade laws. Concerns extend beyond the written regulations alone to matters of strict compliance with rules of origin. U.S. politicians have shown they worry that China and others will flood the U.S. with manufactured goods – especially autos and steel – in violation of the spirit of the regional trading relationship. They also realize that current rules may not be enough. A careful analysis of how they are working is required, and adjustments made as needed. It is apparent as well that Mexico has to be sensitive to those U.S. concerns in its own policy making and enforcement, with both nations working in complementary fashion. Letter to USTR Emphasizes Large U.S. Trade
Surplus in Steel Trade With Mexico Over the five years ending in 2022, the total U.S. steel trade surplus with Mexico reached $11 billion. “The current trend suggests that, in 2023, it would reach the largest yearly surplus in history: $3.4 billion.” That was one of the powerful points raised by David Gutierrez, the president of CANACERO, Mexico’s trade association for the steel industry, in a letter to US Trade Representative Katherine Tai on Nov. 1. Gutierrez was responding to what he called “recurrent allegations over increasing exports to the U.S.” by Mexico. “There is simply no evidence to support those allegations,” made over the past several months by the U.S. steel industry and several Senators. In fact, as the letter emphasized, the U.S. is benefiting far more from steel exports to Mexico than Mexico is benefiting from steel exports to the U.S: “Currently, U.S. exports account for 14.6% of Mexican steel consumption [while] Mexico’s exports to the U.S. barely account for 2.6% of U.S. steel consumption.” The agreement between the two countries in 2019 states clearly that in determining whether exports have surged “meaningfully,” there must be “consideration of market share.” And U.S. exports’ share of the Mexican market is more than five times greater than Mexican exports’ share of the U.S. market. In a previous newsletter, we wrote: As the Department of Commerce’s International Trade Administration reported in its Global Steel Trade Monitor: “Mexico was the largest market for U.S. steel exports with 45 percent (3.2 mmt), followed by Canada at 44 percent (3.1 mmt). Canada and Mexico have ranked first and second as the top destinations for U.S. steel exports for more than a decade.” Other bullet points in the CANCERO letter, derived from the U.S. Bureau of the Census and the Steel Monitoring and Analysis System, or SIMA:
No Threats But Strong Ammunition The CANACERO letter was careful not to threaten the U.S. with the possibility of Mexican retaliation if the U.S. were to reimpose 25% tariffs on Mexican steel products. In fact, Gutierrez stated in the first paragraph that “the U.S.-Mexico steel relationship is paramount and mutually beneficial for both countries and for the USMCA region.” He added that the Mexican steel industry is a trustworthy ally and partner for the U.S.” and that it is essential to keep working together to build shorter and more secure supply chains and to “combat global excess capacity, mainly from China.” But there is little doubt that, despite what CANACERO calls “unfounded” allegations, if the U.S. acts against Mexico’s steel exports to the U.S., a Mexican response would have a significant impact on the U.S. steel industry. The May 17, 2019, agreement that ended tariffs on Mexico under Section 232 of the Trade Expansion Act of 1962 permits such retaliation. The CANACERO letter ends with a table listing the top 10 U.S. steel exports to Mexico, by product category. According to an analysis of U.S. Census data, in 9 of the 10 categories, U.S. exports have increased by at least 37% between the 2015-17 base and 2023 – and in some categories by far more. For example, stainless pipe and tube exports have jumped 66%; cold-finished carbon and alloy bars, 68%; plate cut lengths, 63%. These data are included with the letter without explicitly stating the risk for the U.S. industry. But there is little doubt that Mexico has ammunition to use if it wishes. This newsletter responded to a question from a reader last month by quoting from the 2019 agreement: “In the event that imports of…steel products surge meaningfully beyond historic volumes of trade over a period of time, with consideration of market share,..the importing party may impose duties of 25 percent.” As we pointed out, the key phrase is “importing party,” not “United States.” This means that Mexico not only has a right of retaliation, but also has the same right as the U.S. to initiate Section 232 action against U.S. steel exports to Mexico that constitute surges. Mexican Steel Industry Cooperates with U.S. by Monitoring Trans-Shipments and Placing Tariffs on China, Turkey and Others The letter makes it clear that a tit-for-tat exchange of penalties is not what the Mexican industry wants. To the contrary, CANACERO emphasizes the cooperation it has provided on issues important to the U.S., such as monitoring to prevent trans-shipment of steel exports through Mexico to the U.S. to avoid tariffs. Gutierrez cited a joint statement from the recent U.S.-Mexico High Level Economic Dialogue (HLED): “Ambassador Tai and Secretary Buenrostro agreed on the importance of enhancing steel and aluminum trade monitoring efforts.” In August, the Mexican government adopted 25% tariffs on “steel imported from China and several other countries outside of North America, including Turkey, India and South Korea.” Those tariffs match the duties imposed by the U.S. under Section 232. “The purpose,” said the letter, “is to deter China and other countries from shipping excess steel to Mexico.” In that joint statement following the recent High Level Economic Dialgoue (HLED), the two countries declared: The United States and Mexico are strengthening our region’s supply chains, supporting economic development in Central America and southern Mexico, coordinating to expand workforce development efforts. We collaborated by exchanging best practices to develop secure next generation telecommunications and information and communication technologies (ICT) networks. We are using the HLED framework to reduce inequality and poverty, boost job creation, catalyze investment in our people, and achieve greater regional prosperity. The President of CANCERO also noted that earlier this year the largest Mexican steel mills collaborated with U.S. Customs and Border Protection (CBP) on a pilot program for “trade digitization and supply chain security for steel exports entering the U.S. As part of the pilot, Mexican steel companies have approved a Steel Tech Demo in collaboration with CBP.” The main objective of the project is to “ensure trust, efficiency and transparency that the steel produced and exported from Mexico into the U.S. has a traceable footprint,” complying with CBP requirements for origin. U.S. Interest Grows in Favoring Clean Steel, Like That from Mexico The CANACERO letter makes another key statement: The use of Mexican steel represents a step forward in the fight against climate change given the fact that it is one of the cleanest in the world. The vast majority of Mexican steel is produced with electric arc furnace technology with carbon emissions way below the world’s average. As the U.S. has become more concerned about climate change and the need to protect the competitiveness of the U.S. steel industry, which is making ,large investments to produce clean steel. So interest is growing in developing a system that favors clean steel imports. Three Republicans led by Louisiana Sen. Bill Cassidy introduced legislation Nov. 2 that would “impose a fee on products imported from high greenhouse gas-emitting countries, a move aimed at protecting U.S. manufacturers from competition from China and other countries with lax environmental standards,” reported Politico. “With the foreign pollution fee, we’re attempting to level the playing field to say, ‘OK, China, if you choose not to enforce environmental regulations, we’re going to levy a fee to compensate our country,’” Cassidy said in an interview, characterizing the proposal as a “Republican climate policy.” The American Iron and Steel Institute (AISI), a Washington-based trade association, expressed enthusiasm. “The most effective way to reduce global greenhouse gas (GHG) emissions is through policies that hold the most GHG-intensive producers in the world accountable,” said Kevin Dempsey, the institute’s president, in a press release. “AISI thanks Senator Cassidy for his leadership in introducing legislation to establish a GHG border fee to accomplish that goal.” Some AISI members, such as Nucor, use electric arc furnaces with limited emissions, but, according to Reuters, one of the largest, Cleveland-Cliffs is making a massive “bet on blast furnaces,” which, in their current state, are less environmentally friendly. The Cassidy bill follows bipartisan legislation from Sens. Kevin Cramer (R-ND) and Chris Coons (D-Del) that would order the Department of Energy to produce a study on the emissions intensity of producing various goods in different countries “in order to demonstrate the relative ‘carbon advantage’ that U.S. companies have over their foreign competitors.” Either of these steps could eventually lead to a U.S. carbon border adjustment mechanism (CBAM) that would apply penalties for high-carbon imports. Inevitable Movement of the Global Steel Industry Toward Decarbonization It is clear that the global steel industry will have to get cleaner. A report issued last month by the research firm Wood Mackenzie concluded: Decarbonisation will support the emergence of new production, processing and trading hubs for low-carbon iron and steel. Driven by rising demand for green steel, the industry’s push for net zero is set to transform the value chain of a commodity essential to the industrialised world. The report, titled, “Metalmorphosis: How decarbonization is transforming the iron and steel industry,” pointed to three driving factors: “1) steel producers moving to phase out highly polluting blast furnaces and replace these with electric arc furnaces (EAFs), powered by renewables; 2) growing demand for less carbon-intensive feedstocks; and 3) the steel industry’s increased use of high-grade scrap through recycling.” The firm predicts that “mature markets with higher carbon prices will move [away] from importing finished steel from more emissions-intensive producers, such as China and India.” Instead, low-emission steel produced in electric-arc furnaces (EAF) will dominate. Wood Mackenzie notes that “steelmakers in Europe, Japan, China and the US are the first responders in EAF adoption.” The firm neglects to mention Mexico, where producers like Deacero, the Monterey-based family-owned steel manufacturer, is a leader in green steel production. An Environment & Energy article about the report quoted its co-author, Isha Chaudhary of Wood Mackenzie: Iron and steel production accounts for approximately 8% of the world’s carbon emissions and is a hard-to-abate industry. With the right levels of investment and policy support, decarbonizing the industry is a realizable goal, bringing with it the potential to transform the industry outlook. Chauydhary continued, “As this transformation takes hold, the impact on trade patterns and the steel value chain will be substantial. The decarbonization of iron and steel is already underway, and few industry players will be left untouched.” Near-Shoring Boosts Mexico’s Economy – and Helps the U.S. as Well In a piece headlined, “Mexican businesses warmed by glow of ‘near-shoring’ dawn,” Reuters reported that “the trend of locating manufacturing capacity in Mexico, closer to the U.S. market, rather than in Asia [is projected to] add up to 1.2 percentage points to growth, which is expected to reach 3.5% this year.” The article by Noe Torres on Nov. 6 added: Nearshoring was on the lips of many executives during third quarter earnings calls, and in the first six months of 2023, Mexico raked in around $29 billion in foreign direct investment, up 5.6% from 2022. More than half was in the industrial sector. Near-shoring benefits not just Mexico, but the U.S. as well. Shorter and more secure supply chains substitute for longer ones to Asian markets like China, which have been found to be unstable. Torres quoted Lorenzo Berho, head of construction firm Vesta as saying that Mexico “has a great labor pool. It has good logistics. Enrique Navarro, finance chief at Banco Regional said that relocation activity should fuel "a lot of growth" in northern, western and central Mexico. “As it seeks to lure manufacturing capacity away from Asia, Mexico can take advantage of its shared border with the United States, the world's largest economy, and multiple trade pacts, including USMCA, which includes Canada,” said the article. In a good example of the trend, Deacero imports scrap from the U.S. to Mexico, uses it to manufacture steel wire, which is then sent to a Mid Continent Steel & Wire, a Deacero subsidiary in Poplar Bluff, Mo., that is the largest U.S. nail manufacturer and a major employer in southeast Missouri. The Reuters article reported that “total Mexican construction output jumped almost by 46% in August year-on-year.” Mexico and U.S. Collaborate on New Technology to Identify Steel
With Chinese and Other Foreign Content The U.S. and Mexico are enhancing their collaboration to thwart the illegal transshipment of steel. In an enhanced effort to increase the transparency of North American steel supply chains, advanced technology will be able to detect and report the country of origin of metal products being shipped across the border from Mexico so proper tariffs can be assessed. As we reported in our last newsletter, President Andres Lopez Obrador on Aug. 15 imposed 25% tariffs on steel imported from countries such as China with which Mexico does not have a free trade agreement. Those tariffs match the duties imposed by the United States in 2018 under Section 232 of the Trade Expansion Act of 1962. The intent of the new tariffs is to deter China and others from shipping excess steel without tariffs to Mexico, making minor upgrades, and then sending it across the border, tariff-free, to the U.S., benefiting from the zero tariffs among USMCA countries. The transshipment of steel products from China and other countries through Mexico to the U.S. has been a major concern of the Biden Administration in its campaign against global overproduction of steel, and the new Mexican tariff measure strikes a blow against this activity which harms the U.S. and Mexican steel industries. In response to the Mexican action, a spokesperson for the U.S. Trade Representative stated, “The United States welcomes Mexico’s efforts to address global non-market excess capacity in the steel sector.” Representatives of the U.S. Customs and Border Patrol (CPB) met earlier this month in Washington with officials from the Mexican Embassy and Deacero, a major clean Mexican steelmaker, to discuss the culmination of a test project on the new interoperable system which, among other functions, can identify the foreign origin components of steel products imported from Mexico to the U.S. In a press release on Sept. 12, Vincent Annunziato, the CPB’s director of the Division of Business Transformation and Innovation, announced the completion of the first interoperability test and stated: Global interoperability standards will help unify the approach to transparent supply chains within both the public and private sectors, streamlining communication and improving both security and facilitation. The standards are part of a broader CBP modernization strategy under its Silicon Valley Innovation Program, with cohort members mesur.io, Neoflow, and Transmute. Karyl Fowler, CEO of Austin-based Transmute, said in a press release that the test project was “a culmination of nearly four years of work alongside U.S. CBP and reaffirms the immense impact verifiable data technologies have in modernizing and securing international trade transactions from product origins to the end consumer.” An article in Identity Week stated: The open standards technology used in the demonstration presented an efficient solution to issue, manage, and present critical trade documents rather than depending on physical documents that could be easily tampered with, having a ripple effect down the operation chain. Question: Can Mexico Respond to a U.S. Surge in Steel? A reader asks, “I have heard a lot of threats from U.S. steelmakers lately, and I am wondering if the May 17, 2019, agreement that ended Section 232 tariffs for USMCA countries allows only the U.S. to respond to a Mexican surge by reimposing 25% duties. But isn’t it reciprocal? Can Mexico respond to a U.S. surge?” Yes, Mexico can. In fact, Mexico can act right now, proactively – and with good reason. Yes, Mexico can. The agreement states clearly that either side may respond to a surge by the other side by reverting to previous tariffs. Here is the relevant passage: In the event that imports of aluminum or steel products surge meaningfully beyond historic volumes of trade over a period of time, with consideration of market share, the importing country may request consultations with the exporting country. After such consultations, the importing party may impose duties of 25 percent for steel and 10 percent for aluminum in respect to the individual product(s) where the surge took place. Note that the terms are “importing country” and “exporting country,” not “United States” and Mexico.” Thus, the two countries have equal rights under the agreement. Further evidence comes later in the section, where the agreement states that in assessing whether a surge has occurred, “the United States will consider that new investment in the United States may require an additional 225,000 metric tons of billet from Mexico; Mexico will consider that new investment in Mexico may require an additional 200,000 metric tons of cold-rolled steel from the United States.” If Mexico could not impose tariffs following a U.S. surge, there would be no need to include the clause about new investment in Mexico requiring extra cold-rolled steel from the United States. How can Mexico act first? The agreement lists 52 different individual categories of steel products, and it makes clear that a surge in any one of them is actionable. Mexico can make the case that in several categories, there is a surge in U.S. exports. Mexico could easily take the offensive. Does Mexico have reason to respond to a U.S. surge? Our guess is that Mexico is taking a close look at U.S. exports of individual steel products. But our expectation is that, even if it does have a valid claim, Mexico would prefer to continue to maintain a productive relationship with the U.S. and not disrupt it with what would become tit-for-tat claims, harming a burgeoning North American supply chain that is supplanting dependence on China. There appears to be considerable risk for U.S. steelmakers in igniting a trade conflagration with their Mexican counterparts. As the Department of Commerce’s International Trade Administration reported in its Global Steel Trade Monitor: “Mexico was the largest market for U.S. steel exports with 45 percent (3.2 mmt), followed by Canada at 44 percent (3.1 mmt). Canada and Mexico have ranked first and second as the top destinations for U.S. steel exports for more than a decade.” Advice to Doubters of Mexico’s Rights: Read the 2019 Agreement We can also pass along this advice: Before calling for extreme actions, read the May 2019 agreement, linked here again. It states that consultations and duties must result from a meaningful surge, but it never defines “surge,” much less “meaningful.” The agreement also refers to “historic volumes of trade,” but it does not define “historic” or state a base year. Recently, an op-ed by the head of an organization called the Coalition for a Prosperous America made over-the-top claims about “surging Mexican steel.” The piece in the Johnstown, Pa., Tribune-Democrat on Aug. 23 stated that “Mexico is now exporting steel products to the U.S. at levels surging well beyond historic baselines.” The piece claims that certain types of steel exports increased “compared to the baseline period of 2015 to 2017.” But the word “baseline” doesn’t even appear in the May 2019 agreement, nor does the agreement cite any specific year. U.S. interests should not be allowed to unilaterally define terms that appear in the agreement. For example, the agreement uses the phrase “with consideration of market share” in discussing the term “surge.” CANACERO, the Mexican steel association, noted earlier this year that “Mexican steel exports to the US represented only 3.3% of [US] domestic consumption, while the market share of the United States in Mexico amounts to 14.6%.” The U.S., then, has captured more than four times the share of the Mexican market as Mexico has captured of the U.S. market. Business Executives and Government Officials Meet in 13th U.S.-Mexico CEO Dialogue U.S. and Mexican business executives and high-ranking government officials met in Washington on Sept. 27 and 28 in the 13th U.S.-Mexico CEO Dialogue, hosted by the U.S. Chamber of Commerce and the Consejo Coordinator Empressarial. The two-day event focused on boosting economic growth in the two nations, in large part through increasing trade and investment. It brought together companies that are dedicated to “committing resources and investing in both markets to advocate for the bilateral relationship.” Irwin Altschuler, a Deacero official in the company’s global trade and corporate affairs headquarters in Washington, spoke at the conference about the importance of talent mobility between Mexico and the U.S., making suggestions on improving the E-Visa process. Representatives of the U.S. Chamber and the auto parts company Martinrea also made supportive comments on the subject. The CEO Dialgue was followed by the High-Level Economic Dialogue (HLED), relaunched by Presidents Biden and Lopez Obrador in 2021 and attended by Cabinet-level officials of the two countries. Secretary of State Antony J. Blinken, Secretary of Commerce Gina Raimondo, U.S. Trade Representative Katherine Tai, and Ambassador Ken Salazar chaired the HLED for the United States. Secretary of Foreign Relations Alicia Bárcena, Secretary of Economy Raquel Buenrostro, and Ambassador Esteban Moctezuma chaired the HLED for Mexico. In a joint statement following the meeting the two countries declared: Under the HLED, the United States and Mexico are strengthening our region’s supply chains, supporting economic development in Central America and southern Mexico, coordinating to expand workforce development efforts. We collaborated by exchanging best practices to develop secure next generation telecommunications and information and communication technologies (ICT) networks. We are using the HLED framework to reduce inequality and poverty, boost job creation, catalyze investment in our people, and achieve greater regional prosperity. The two countries stressed that improved transparency and effective monitoring of steel imports and exports are needed to stop the trans-shipment, or “triangulation” of China’s steel to the United States. Mexico Imposes 25% Tariff on Steel, Aligning Its Trade Policy With the U.S. and Encouraging More Secure Supply Chains
In a presidential decree last month, Andres Manuel Lopez Obrador of Mexico took a dramatic step to further align his country’s trade policy with that of the U.S. by placing tariffs on strategic products, including steel from countries such as China. The steel tariff advances the shared interests of the two countries in reducing global excess steel production and preventing transshipment, enhancing the North American economic partnership, and helping foster shorter, more secure supply chains. On Aug. 15, Mexico imposed 25% tariffs on steel imported from China and a number of other countries outside of North America including Turkey, India and South Korea. Those tariffs match the duties imposed by the United States in 2018 under Section 232 of the Trade Expansion Act of 1962. Their effect is to deter China and others from shipping excess steel to Mexico, perhaps making minor upgrades, and then sending it across the border, tariff-free, to the U.S., benefiting from the zero tariffs among USMCA countries. Transshipment of steel products from China and other countries through Mexico to the U.S. has been a major concern of the Biden Administration. The new Mexican tariff measure strikes a blow against transshipment of Chinese and other steel to the United States, as well as to the global over-supply of steel, most of which is the result of massive government subsidies, particularly by China. The U.S. applauded the new policy. In a statement on Aug. 18, USTR spokesperson Sam Michel stated: The United States welcomes Mexico’s efforts to address global non-market excess capacity in the steel sector. As noted during the 93rd Session of the OECD Steel Committee, the increase in global excess capacity continues to raise risks of further oversupply in the steel sector. At its session in March, the Committee “highlighted continued concerns regarding Chinese steelmaking capacity, accounting for 47% of the world’s total in 2022.” China is by far the largest steelmaker in the world, with an estimated 1 billion tons of production this year. India is second at 118 millionJapan is third, at 96 million; the U.S., fourth, 86 million. The new Mexican tariffs, which expire in two years, apply to all countries with which Mexico does not have a free trade agreement. Leading Mexican Senator Hails Regional Partnership on Steel, Reminds U.S. of Its Steel Surplus with Mexico “The U.S. and Mexico should continue working together as regional partners and allies to strengthen our clean bilateral supply chains – particularly in light of…disruptions that have reshaped supply to the U.S. markets,” wrote Mexican Sen. Eduardo Ramirez in a letter to fellow legislators in the United States. The Aug. 24 letter went to Rep. Rick Crawford (R-Ark), the Chairman of the Congressional Steel Caucus, and Rep. Frank Mrvan (D-Ind), Vice Chairman of the caucus. Ramirez, president of the Office of Political Coordination and former president of the Mexican Senate, cited the executive order raising his nation’s tariffs on steel. The measures, he wrote, “are aimed at defending the region’s steel and boosting its global competitiveness through stricter Mexican trade enforcement rules that will ensure fair trade in steel and prevent the transshipment of steel imports.” He said he was “convinced that this is the type of action for cooperation that our countries can undertake to strengthen the competitiveness of our respective steel industries.” In his letter, he reminded the Congressmen that “the bilateral steel trade relationship has been very favorable to the U.S. steel industry. Since 2017, the average surplus in finished steel products for the U.S. has been one million tons,” a total value of more than $11 billion. He also noted that Mexico is the second-largest market for U.S. steel exports. Yes, the Section 232 Agreement between the U.S. and Mexico Allows Mexico to Retaliate If the U.S. Reimposes 232 Tariffs on Mexican Steel One of our readers asked this question: “I have heard the U.S. making complaints about Mexican steel imports lately, but isn’t it true that if the U.S. took action against Mexico, then Mexico would be free to retaliate immediately?” The reader is correct. On May 17, 2019, the U.S. agreed to lift Section 232 tariffs on Mexican steel and aluminum. As part of that deal, the countries issued a three-page Joint Statement. It said that if “imports of aluminum or steel products surge meaningfully beyond historic volumes of trade over a period of time, with consideration of market share, the importing country may request consultations with the exporting country.” The document doesn’t define the phrase “surge meaningfully.” At any rate, after the consultations, “the importing party may impose duties of 25 percent for steel.” But, with regard to the reader’s question, the Joint Statement continues: If the importing party takes such action, the exporting country agrees to retaliate only in the affected sector (i.e., aluminum and aluminum-containing products or steel). So U.S. 232 tariffs on Mexican steel would almost inevitably lead to Mexican tariffs on U.S. steel. And vice versa. The agreement does not require either country to go through an adjudication process. But once the U.S. or Mexico imposes 232 tariffs on the other’s steel products, this would inevitably lead to a tit-for-tat cycle of steel tariffs that would be damaging to both countries at a time when they are working cooperatively – through mechanisms such as Mexico’s recently imposed steel tariffs on other nations – to deter transshipments of steel from China and other countries outside of North America. It's worth noting that the Joint Statement also says that Mexico and the U.S. agree to take steps to “prevent the transshipment of aluminum and steel made outside of Mexico or the United States to the other country.” That is exactly what Mexico did on Aug. 15. But a tit-for-tat of steel tariffs between the U.S. and Mexico could undermine future cooperative efforts by the two countries to protect North American steelmakers from threats posed by China and its close partners who do everything possible to avoid and evade U.S. and international trade rules. Mexico Becomes the Number-One Trading Partner of the U.S. as the Near-Shoring Trend Accelerates You can see the alignment between Mexico and the U.S. in the data. As Luis Torres of the Federal Reserve Bank of Dallas pointed out: Mexico became the top U.S. trading partner at the beginning of 2023, with total bilateral trade between the two countries totaling $263 billion during the first four months of this year…. Mexico’s gains mirror its rise in manufacturing, a key component of goods moving between it and the U.S. During the first four months of 2023, total trade of manufactured goods between Mexico and the U.S. reached $234.2 billion. Mexico, rather than China, is providing more of the components – including steel – that U.S. manufacturers need. Torres added, “Mexico–U.S. trade during the first four months of 2023 represented 15.4 percent of all the goods exported and imported by the U.S.; the Canada–U.S. share followed at 15.2 percent and then the China–U.S. share at 12.0 percent.” A Business Insider article on Aug. 20 noted that “the seeds for this shift were sown before the pandemic — with former President Donald Trump's tariffs on some Chinese goods and the signing of the US-Canada-Mexico trade deal.” But a major factor has also been “an accelerated shift toward ‘nearshoring,’ a practice in which countries bring supply chains for crucial goods to countries that are close physically and politically.” The article continued: Nearshoring increased during the pandemic because of the increased cost of shipping products across the Pacific and the consumer demand for faster delivery times — we'll call the latter "The Amazon Prime Effect." The New York Times' Peter S. Goodman also wrote earlier this year that companies like Walmart were increasingly looking closer to home for ways to fill their needs as political tensions between the US and China heated up. "It's not about deglobalization," Michael Burns, a managing partner at Murray Hill Group, an investment firm focused on the supply chain, told Goodman. "It's the next stage of globalization that is focused on regional networks." A Macro Hub Opens in Laredo in a Further Boost to North American Supply Chains Another important supply-chain development occurred on Aug. 7, when Mid-Continent Steel & Wire opened a new Macro Hub facility in Laredo, Texas. Gov. Greg Abbott delivered the keynote address at a ribbon-cutting ceremony and then toured the facility, which will create more than 100 new jobs and bring $22 million in capital investment to the Laredo region. Mid-Continent, a leading steel and wire manufacturer headquartered in Houston, TX.is the largest nail manufacturer in the United States, producing nails at its facility in Poplar Bluff, MO. It is part of the Deacero Group, a family-owned a company that was started more than 70 years ago in a small warehouse in Monterrey, Mexico. Deacero, a significant producer of low-emission steel, which opened a global trade and corporate affairs office in Washington, in 2021, is a prime example of effective near-shoring value chains. In his remarks at the ribbon-cutting, Gov. Abbott said, “I want to say a Texas-sized thank you to Mid-Continent Steel and Wire for choosing Laredo to build their new Macro Hub facility. When you look at the size of this facility, it shows you what is needed to keep up with the size of demand for the steel and fencing products made and distributed here.” He added: Steel plays an important role in the building of the future of our state. Texas is the fastest-growing state in the United States, …there is truly no better place for a steel-related business to address that growth than a business like this in a location like this. Laredo plays a pivotal role for Texas ranking No. 1 for exports in the United States for 21 years in a row. This facility will help add to that trade. The Governor was joined by Raul Gutierrez, Deacero Group president and board chairman, who said at the ceremony, "This Macro Hub will extend the North American value chain so manufacturers in Texas and throughout the US will have the steel and wire products they need, quickly and securely.” Also speaking was Fernando Villanueva, the CEO of Mid-Continent, who complimented Governor Abbott on his “robust, pro-growth economic agenda,” saying he appreciated how it “has helped our company grow and prosper.” Senior Advisor Elizabeth Heaton served as Master of Ceremonies, and Gov. Abbott presented a proclamation to Villanueva to commemorate the grand opening of the Macro Hub facility. U.S. Steel Companies Enjoy Robust Years as Cleveland-Cliffs Bids to Expand In a deal disclosed Aug. 13, Cleveland-Cliffs has offered $7.3 billion in cash for U.S. Steel Corp. The potential deal between U.S. firms would create the world’s 10th-largest publicly traded steel company by market capitalization. Nucor, another U.S. steel company, is number-one, and Steel Dynamics ranks eighth. Reuters reported on Sept. 5 that the proposed purchase is part of a strategy by Cleveland-Cliffs CEO Lourenco Goncalves to acquire blast furnaces, positioning his company “as an outlier in an industry shifting towards cheaper and more environmentally friendly electric arc furnaces.” Reuters noted, “High costs and environmental opposition have prevented the construction of blast furnaces at steel mills in the United States since 1980…. Goncalves is on a mission to snap up all that are left.” With blast or electric arc furnaces, U.S. steel companies have been doing well in recent years. From the start of 2020 to Sept. 11, 2023, the NYSE American Steel Index has climbed 86%% compared with 39% for the benchmark Standard & Poor’s 500. There is no doubt that U.S. steel companies have benefited since the Section 232 steel tariffs were imposed in 2018. For example, for the 12 months ending June 30, 2020, Nucor’s earnings were $1.68 per share, compared with $21.71 for the most recent 12-month period. Steel Dynamics doubled its revenues over the same three years. Both Nucor and Steel Dynamics have more than tripled in price since Jan.1, 2020; Cleveland-Cliffs has doubled. U.S. steel companies still face management challenges as well as soft recent global demand, according to BQ Prime. But the trade journal adds, “Domestic steel demand is expected to remain robust going forward as pending and stalled projects are pushed to completion.” Undoubtedly, the new Mexican tariffs will help U.S. companies as well. This includes not only in the U.S. but also for U.S. steel companies that have investments in Mexico. These materials are distributed by Glassman Enterprises, LLC, on behalf of Grupo Deacero, S.A. de C.V. Additional information is available at the Department of Justice, Washington, D.C. National Security Adviser Sullivan Proposes New International Economic Strategy, With Key Role for North American Supply Chains
In an important speech at the Brookings Institution on April 27, the U.S. National Security Adviser, Jake Sullivan, laid out a comprehensive international economic strategy in the face of new “geopolitical realities.” A key element of the strategy is strengthening North American supply chains, especially as they address the threat of climate change. “We are leveraging the Inflation Reduction Act to build a clean-energy manufacturing ecosystem rooted in supply chains here in North America, and extending to Europe, Japan, and elsewhere,” he said. But, he added, “our cooperation with partners is not limited to clean energy.” He cited semiconductors, a sector where, with Commerce Secretary Gina Raimondo heavily involved, the U.S., Mexico and Canada are working together “to adapt government policies and increase investment in semiconductor supply chains across North America. “ More broadly, a survey earlier this year by the firm Capterra found that 88% of U.S.-based small and medium-sized businesses will “reshuffle their supply chains to utilize suppliers in the U.S. or Mexico in 2023,” according to an article in Freightwaves. “The switch to nearshoring is happening faster than was predicted in 2021,” the survey said. “Most industry professionals predicted this change would happen very slowly over five or more years. But even the 2022 numbers we see in the data are stronger than those predictions, and 2023 will continue to see a rapid shift to nearby suppliers.” The effort to expand North American supply chains is part of what Sullivan called “a modern industrial and innovation strategy.” He called this strategy “a new Washington consensus,” a reference to a term coined in 1989 that emphasized reducing trade restrictions, reforming politically oriented taxes, eliminating nationalized industries, and, in general, having free-market policies dominate. What Sullivan described was closer to what is called “industrial policy,” where the government takes a larger role in shaping the economy. Mexico and U.S. may, in fact, be moving toward a shared industrial policy. Last fall, Mexico’s Economia, its economics ministry, presented, “Towards an Industrial Policy,” which seeks to align the efforts of public and private actors across “four cross-cutting axes:…innovation and technological-scientific trends; training of human capital for new trends; promotion of regional content; and sustainable industries.” The new Washington consensus, as described by Sullivan, addresses four major challenges: 1) the hollowing out of America’s industrial base as the nation outsourced production to other countries, especially China; 2) the failed assumption that economic integration would make China and Russia more responsible and the subsequent threats to national security that these two nations are now posing; 3) the climate crisis and the need for an energy transition; and 4) inequality at home and what Sullivan calls “its damage to democracy.” On the last point, Sullivan said that the “China shock…hit pockets of our domestic manufacturing industry especially hard…[and] frayed the socioeconomic foundations on which any strong and resilient democracy rests.” Worries That the U.S. Will Try to Go It Alone Sullivan was at pains not to give the impression that the U.S. believes that nearshoring, rather than onshoring (making everything possible in the U.S.) is the answer to current challenges, but observers still got the impression that the U.S. wants to try to go it alone if it can. In his response to the speech, Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics welcomed Sullivan’s vision for a “strong, resilient, and leading-edge techno-industrial base” shared between the U.S. and partners. That vision “is much more realistic than making everything at home, but the speech will not change widespread perception that bringing as much activity as possible to the United States—often to the consternation of U.S. allies, as with the Inflation Reduction Act—is the primary goal.” Similarly, David Dollar, a senior fellow in economics at Brookings, said in reaction to the speech, “What worries me is the heavy focus on industrial policy measures that involve both subsidies and protection of the domestic market through ‘Buy American’ provisions…. In my opinion the protectionism will prove to be a mistake.” Fareed Zakaria of CNN also said that parts of the new “Biden Doctrine” made him nervous. “Sullivan insisted that these polices were not designed to be ‘America First’ or ‘America Alone,’” wrote Zakaria in his Washington Post column. “But the facts are clear. Almost every element of Biden’s economic policy has a ‘Buy America’ component to it.” Oren Cass, the influential executive director of American Compass, a right-of-center think tank, praised Sullivan for his “sophisticated critique of ‘oversimplified market efficiency.’” But Cass warned that, contrary to Sullivan’s approach, a “de-coupling” from China and not merely a “de-risking” is essential. Cass wrote, “We only countenanced a coupling with China because we assumed wrongly that it would lead to economic and political liberalization.” That liberalization didn’t happen. As Sullivan said, “Economic integration didn’t stop China from expanding its military ambitions in the region, or stop Russia from invading its democratic neighbors. Neither country has become more responsible or cooperative.” In his speech, Sullivan noted that “the main international project of the 1990s was reducing tariffs.” But tariffs aren’t everything. They certainly aren’t a strategy. “Asking what our trade policy is now – narrowly framed as plans to reduce tariffs further – is simply the wrong question,” he said. “The right question is: how does trade fit into our international economy policy, and what problems is it seeking to solve?” Number-one on Sullivan’s list of problems is “creating diversified and resilient supply chains.” And it’s clear that Mexico plays a critical role in that diversification and resilience. New Investment in Mexico Bolsters North American Near-Shoring A month before the Sullivan speech, David Gantz, who is the Will Clayton Fellow in Trade and Economics at the Baker Institute in Houston, released a paper on the favorable consequences of foreign investment in Mexico. Since October 2021, Gantz writes, “an estimated $7 billion in new foreign investment has entered the state of Nuevo Leon, currently one of the Mexican states most popular for foreign investment. About half of this investment has come from the United States. Why is foreign investment pouring into Mexico in what Samuel Garcia, the new governor of Nuevo Leon, called “a geopolitical planetary alignment”? Gantz lists:
Gantz points out that U.S. policy makers often lean toward onshoring or “Buy American” approach. “Realistically, however, for some products labor costs and other factors make elimination of imports impractical — including most footwear, clothing, consumer electronics, and items like furniture and computers that are made in Mexico.” Nearshoring is a win-win-win proposition. Gaining are Mexico, the U.S., and American consumers. A 24-Year-Old Entrepreneur: The Re-Orienting of Supply Chains to Mexico Is ‘Unstoppable’ In a fascinating Forbes interview, Gary Drenik, CEO of Prosper Business Development, a consulting firm, interviewed Alfonso De los Rios, the 24-year-old founder of Nowports, the largest 100% digital freight forwarder in Latin America. De los Ríos, from Monterrey, “started programming at a very young age after growing up in a home where there was no shortage of economic hardship.” Here's an excerpt from the interview: Drenik: What else does Mexico need to become the iconic nearshoring market? Alfonso De los Ríos: With nearshoring nipping at the heels of the Mexican economy, industrial developers increased the speed of building new projects during 2022 (70% more than in 2021). However, more than twice as much space would still be needed to be built in 2022. Mexico is becoming the hottest market in the region, in terms of production, skilled professionals, and advanced facilities. This is going to renew the private sector in the country with long-lasting positive consequences. Drenik: Why is the “nearshoring effect” massively attracting international companies to Mexico? De los Rios: Tesla is the latest in a long stream of companies to announce big plans of building factories in Mexico, following other big names, while warehouses are becoming shiny gems for multinational companies in different Mexican cities. It’s clear that the re-orientation of global supply chains is unstoppable. That is why we have recently expanded to the U.S. to bridge the gap between the two regions and believe that Mexico is becoming increasingly attractive for big companies looking to increase their manufacturing standards and delivery times. Drenik: What is the big nearshoring picture ahead? De los Rios: Companies that set a foot in Mexico will have greater visibility, shorter delivery times, and influence the quality of their products. It’s also important that the shipping industry can keep up with these transformations. In that sense, it needs to become paperless and data-driven. In this issue:
As U.S. relations with China deteriorate and the full impact of COVID disruptions ripples throughout the world, interest grows in building stronger North American supply chains –shorter and sturdier than those currently stretching halfway around the globe. The leaders of North America met in a summit in Mexico City in January and agreed to build on President Trump’s 2020 trade agreement, the USMCA, to find new ways to integrate economies, boosting manufacturing and significantly reducing reliance on Asia. The leaders pledged to persuade workers, businesses, and public servants in the three countries that uniting the continent will boost national security and manufacturing output and employment. Now, we are seeing the three countries take further action. The U.S., Mexico, and Canada recently approved USMCA Free Trade Commission Decision No. 5 on North American Competitiveness. On Feb. 23, Katherine Tai, the U.S. Trade Representative, released this statement: The COVID-19 pandemic exposed serious gaps in our three countries’ responses to trade flow disruptions during emergencies, as well as our understandings of what constitutes critical infrastructure priorities. Our increasingly integrated supply chains depend on the shared maintenance of North American trade flows, especially in light of the supply chain disruptions caused by Russia’s unjust and unprovoked invasion of Ukraine, as well as continuing challenges posed by non-market actors. Decision No. 5 set up a Sub-Committee on Emergency Response, with members from all three countries, to coordinate North American efforts to maintain regional trade flows during emergency situations. The Decision also created a Working Group “to develop a shared understanding of what constitutes critical infrastructure priorities.” USTR is leading the coordination of both the Sub-Committee and Working Group in partnership with technical experts from U.S. government agencies. Working together under the USMCA,” said Tai, “we can build resilient supply chains and make North American even more globally competitive.” Shift of Supply Chains to Mexico Happening Faster Than Expected A FreightWaves article on Feb. 20 noted that “while the rise of near-shoring to Mexico has been steadily increasing over the past decade, the pandemic and several other recent global disruptions have kicked the trend into high gear.” The piece cited a survey by Capterra that found that “about 88% of U.S.-based small and medium-sized businesses (SMBs) will reshuffle their supply chains to utilize suppliers in the U.S. or Mexico in 2023.” The survey concluded that ‘the switch to near-shoring is happening faster than was predicted in 2021. Most industry professionals predicted this change would happen very slowly, over five or more years. But even the 2022 numbers we see in the data were stronger than those predictions, and 2023 will continue to see a rapid shift to nearby suppliers.” FreightWaves focuses on the global freight market and is a major provider of data for the global supply chain. ‘This Continent’s Trading Bloc Is Enormous, and the U.S. Is the Main Beneficiary’ On Feb. 8, Raul Gutierrez, CEO of Grupo Deacero, a Mexico-based steel company, commented on the North American summit in a widely distributed RealClearPolicy piece. “The groundwork was laid for shortening supply chains by the USMCA, which was approved overwhelmingly in all three countries,” Gutierrez wrote. “The pact lets nearly all goods and services flow freely, without tariffs, across North American borders. “This continent’s trading bloc is enormous, and the U.S. is the main beneficiary. According to the Woodrow Wilson Center, during 2021, “a record 75% of Canadian and Mexican imports came from the United States, making both countries the US’s largest export markets.” Gutierrez quoted Sujai Shivakumar, director of the Renewing American Innovation Project at the Center for Strategic and International Studies, who wrote with two colleagues last year: The rise of an aggressive and revisionist China, a devastating global pandemic, the disruptive churn of technological advancement, and -- most recently -- Russia’s invasion of Ukraine, are prompting a dramatic rethinking of the value of lean, globally distributed supply chains. A Call for Cooperation on Green Energy Through Tax Credits That Encourage North American Steel Use As an example of new cross-border cooperation in North America, U.S. Commerce Secretary Gina Raimondo in September asked Mexico to establish incentives to bring semiconductor manufacturers and the companies that support them to North America. The U.S. and Mexico issued a joint statement promising to “work together to pursue a pilot project to determine the feasibility of near-shoring semiconductor manufacturing inputs.” In his piece, Gutierrez recommended that the U.S. “enlist Mexico’s help with the transition to green energy by allowing U.S. solar and wind developers to claim tax credits -- so long as they use North American steel in the components. The U.S. has already taken this approach with electric vehicles but not so far with the ‘domestic content bonus tax credits’ created by the Inflation Reduction Act.” Gutierrez pointed out that he knows “first-hand the benefits to the United States of shortened supply chains. I head a 70-year-old steel company, started by my family in Monterrey, in northern Mexico. Our firm, Deacero, is a global leader in making steel rod and wire. We have 800 employees across the U.S., with manufacturing plants in Houston and Poplar Bluff, Mo., where our company Mid Continent is the largest domestic steel nails manufacturer.” When Deacero bought Mid Continent in 2012, “workers at the factory…feared it was the beginning of the end,” said an article in the Chicago Tribune. “Instead, Mid Continent's factory has doubled in size since Deacero's purchase.” It’s safe to say that the U.S. would have virtually no nails manufacturing sector if a Mexican company had not bought a Missouri factory that was buffeted by Asian competition. Mexico Reacts Strongly to U.S. Senators Who Suggest Re-Imposing Steel Tariffs At the same time most policy makers seem to understand the importance of North American cooperation in near-shoring, several U.S. Senators appear bent on a different course. Thirteen lawmakers sent a letter asking Tai and Raimondo to hold “consultations” with Mexico over an alleged “surge” in Mexican steel exports in one small category, conduit. Under the 2019 agreement between the U.S. and Mexico that lifted Section 232 tariffs on Mexico in anticipation of the signing of the USMCA, “consultations” are all that are necessary for one country to re-impose 25% steel tariffs on another. But, of course, reimposition invites retaliation. Using U.S. Census and industry data, CANACERO, the Mexican steel association, has pointed out that last year, Mexican steel represented just 3.3% of U.S. consumption – an increase of just one percentage point since 2017. That tiny increase is the result of Mexican steel replacing steel from antagonistic and otherwise unreliable sources, including Russia. By contrast, U.S. steel has captured a 14.6% share of Mexican consumption. Every year, Mexican imports of U.S. steel far exceed U.S. imports of Mexican steel. Between 2017 and 2022, the total U.S. surplus in steel has been more than 6 million tons. Mexico’s Senate responded quickly to the U.S. Senators’ letter, unanimously passing a resolution on Feb. 22, which, according to Politico, sets “the stage for possible retaliation if the Biden administration decides to reimpose Section 232 tariffs on steel imports from Mexico.” Specifically, the resolution, called a Point of Agreement, asks Mexico’s Economy Ministry to start gathering information about U.S. steel exports to Mexico in order to “consider the application of retaliation measures, in the event that the United States of America decides to impose tariffs or other unjustified protectionist measures.” A point of agreement is a request from a Mexican legislator to his respective chamber to assume an institutional position regarding a non-legislative matter. CANACERO tweeted, “We extend our deep appreciation to senator Ricardo Monreal for his commitment to the Mexican steel industry, which represents 1.6% of the national GDP and generates well-being through almost 700,000 highly paid jobs and permanent support to communities.” CANACERO provided important context:
In other words, the experience of steel trade shows how supply chains can shorten and become more reliable. NY Times Podcast Highlights Near-Shoring Between U.S. and Mexico The popular New York Times podcast, “The Daily,” focused Feb. 21 on North American near-shoring. Reporter Peter Goodman explained: For decades, China was at the center of globalization. Multinational companies went pouring into China. We talked about the “China price,” which was code for the cheapest-possible price. This assumption [was] that China…essentially has a limitless supply of workers eager for factory jobs, streaming in from the countryside, and that this was just an unbeatable combination along with investments into ports and other infrastructure by the government, and the buildup of the supply chain. You could get everything in China to make just about any product that you can imagine, from top to bottom. But, said Goodman, “since the pandemic, multinational companies have come to revisit this central faith in China…. Now, we’re trying to figure out what comes next. And what comes next for many companies is figuring out how to make their products closer to their largest markets.” He continued, “Companies are looking for alternatives to factories in China…. So this takes US to Mexico, which is an obvious place if you’re looking for lower wage production and easier land transportation to the United States. Just glance at the map. You end up in Mexico.” Pete Saenz, the mayor of Laredo, Texas, which is booming, tells the podcast, “Of course, the expectation there is that it’s going to increase international commerce for everyone. I’ve even heard the word, ‘a tsunami’ of commerce, trade.” Laredo’s great partner is the northern Mexico state of Nuevo Leon, with Monterrey as its capital and factories only a couple hours from the Texas border. Goodman learns from a Mexican official that “we’ve got a whole industrial park where there’s 28 different Chinese companies that are now sinking billions of dollars into factories in Nuevo León to serve the American market.” This is the way flows of trade are changing. |