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.
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