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November 19, 2017
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U.S.-Mexico trade relations to survive Trump's anti-trade rhetoric, Mexican official says

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The U.S. House's "Border Adjustment Tax" proposal is cause for concern and could affect NAFTA, according to an embassy trade official.

Cross-border trade bonds between the U.S. and Mexico will remain strong and sustainable despite concerns arising from President Trump's protectionist rhetoric, according to a top Mexican trade official.

Kenneth Smith Ramos, head of the Mexican Embassy's Trade and NAFTA (North American Free Trade Agreement) Office, said the two countries aren't "operating in a vacuum," and the trade balance frequently cited and criticized by Trump "does not reflect the level of supply chain integration" between the U.S. and Mexico's agricultural and manufacturing industries. For example, U.S.-produced components are found in about 40 percent of Mexico's exports to the United States, he said.

Mexico buys $23 billion of U.S. exports per year, Smith told the Coalition of New England Companies for Trade (CONECT) 21st annual Northeast Trade and Transportation Conference, held last week in Newport, R.I. Smith said that Mexico, the world's 15th largest economy, is not entirely dependent on the U.S. for its trading activity. He noted that Mexico, the world's 10th largest exporter and 9th largest importer, has trade agreements with 46 nations.

What about NAFTA, another frequent Trump target? Smith said the Mexican government's position is that the 23-year-old treaty would benefit from "modernization" that is based on a "fact-based assessment that reflects reality and avoids political rhetoric." The outcome of any renegotiation must be a win for all three countries involved, and it must maintain the integrity of the integrated supply chains that NAFTA created, he said. Smith did raise concerns about the so-called Border Adjustment Tax (BAT) provision written into a House tax-reform bill, noting that the proposal "could certainly affect relations within NAFTA." The proposal would exempt U.S. exporters from taxes but would tax the sale of imported goods. It also would prevent U.S. importers from deducting the cost of their merchandise, thus effectively taxing them on the full selling price of the goods rather than just on their profit. For example, an exporter that spent $80 on a product that it sold overseas for $100 would pay no tax on its earnings. However, a company that imported goods worth $80 from abroad and then sold them domestically for $100 would pay tax on the full $100.

In theory, such a revision would give U.S. exporters a leg up in world markets and would deliver a big boost to the U.S. dollar. A stronger dollar, in turn, would make imports into the U.S. price competitive, offsetting the impact of the tax hit. However, should the dollar not rise to anticipated levels, importers with thin profit margins could get severely hit, critics contend. U.S. retailers that import much of their goods could experience double-digit cost increases, which they would try to pass on to consumers in the form of higher selling prices.

Concerns over the proposed border tax cast a pall over the panel on which Smith spoke, billed as "Trade, Transportation, and Trump." Besides threatening to raise prices on essential items like food, apparel, and fuel, the proposed border tax could provoke trade retaliation by other countries "on a scale we've never seen before," said panelist Hun Quach, vice president, international trade for the Retail Industry Leaders Association (RILA). Indeed, representatives of approximately 35 embassies have been meeting in Washington to discuss the tax's potential impact on their relations with the U.S., according to Smith.

Along with other provisions in the House tax bill, the border levy would almost certainly result in a higher tax rate for retailers that could reach 50 percent or more, Quach said. RILA is a founding member of the Americans for Affordable Products coalition, a business group formed to fight the BAT.

China is another of Trump's trade bugaboos, and although the recent meetings and phone calls between the U.S. president and his Chinese counterpart, Xi Jinping, appear to have calmed the waters somewhat, tensions remain high. China's government and U.S. businesses are very concerned about the BAT, said Erin Ennis, senior vice president for the U.S.-China Business Council, which represents more than 200 companies that do business with China.

Even if the border tax is not implemented, she said, there are other ways the U.S. could make things more difficult for China, such as imposing short-term duties, bringing more antidumping cases, restricting Chinese investment in U.S. businesses, and (although it appears to be off the table for the moment) designating China as a currency manipulator, among other tactics.

Ennis cautioned that sourcing decisions and transportation could be directly affected by the new administration's policies and actions. Heightened tensions with North Korea, for example, could force ocean carriers to redraw shipping lanes serving neighboring China, and changes in trade policy could accelerate a shift in production from China to Southeast Asia, she said.

Toby Gooley is Editor of CSCMP's Supply Chain Quarterly. Mark Solomon is executive editor—news at DC Velocity, a sister publication of CSCMP's Supply Chain Quarterly.

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