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Mexico imposes retaliatory tariffs on U.S. goods in response to suspension of NAFTA trucking program

June 2009

Overview

 

The Mexican government recently imposed import tariffs on $2.4 billion of U.S. goods after the United States suspended a program allowing Mexican trucks to deliver goods across the border.  When the U.S. closed the southern border to Mexican trucking in March, Mexico promised to retaliate.  Mexico has released a list of 89 U.S. products that will face tariffs of 10 percent to 45 percent.

 

Background

 

The economic minister for Mexico, Gerardo Ruiz Mateos, has announced tariffs on approximately 90 items from 40 states.  As reported by various news sources, U.S. Republican lawmakers said Mexico would impose tariffs on farm goods such as rice, beef, wheat and beans.  In fact, the published list of products includes many other types of products, including wine, household goods and paper products.

 

Mateos said that halting the trucking program violated the North American Free Trade Agreement (NAFTA) between the United States, Mexico and Canada, which was enacted 15 years ago amid opposition from U.S. labor unions.  The International Brotherhood of Teamsters, which represents U.S. truckers, proclaimed on the union's website that the suspension of the trucking program was a victory.  Critics said the program threatened national security and American jobs.  However, the American Trucking Associations and the U.S. Chamber of Commerce, both trade groups, supported the program and protested its withdrawal.

 

On the same day that the Mexican tariffs were imposed, the White House responded that the Obama administration would work with Congress to propose legislation creating a new trucking project that will meet the legitimate concerns of Congress and its NAFTA commitments.  Mexico's decision to impose tariffs on U.S. products was not taken lightly.  For the past 15 years, three successive Mexican administrations have worked to obtain U.S. respect for its NAFTA obligation to allow long-haul trucks across the border.  In 1998, Mexico initiated a complaint against the U.S. under NAFTA's dispute settlement procedures, claiming that the U.S. government had violated its commitment to treat Mexican trucking firms in a non-discriminatory manner.  A NAFTA tribunal unanimously agreed in 2001 that the U.S. government had violated its commitments under the agreement.  The panel ruled not that the U.S. government needed to open its market to all Mexican trucks, but that it must consider qualified applications case by case, rather than assuming all Mexican trucks and their drivers were by definition unsafe.

 

In 2007, Mexico and the U.S agreed to a pilot program that permitted a limited number of Mexican trucking carriers into the U.S. under rigid safety regulations.  The 18-month program challenged the anti-competition Teamsters union's claims that Mexican carriers were not as safe as their U.S. counterparts.  Last month the U.S. trucking union successfully lobbied Congress to insert a provision suspending the trucking program into the $410 billion spending bill.

 

Comment

 

Given the state of the U.S. and Mexican economies, this trade war will be extremely detrimental for western and southwestern states such as California, Texas and Arizona.  Mexico is the U.S.' third largest trading partner, and according to the Wall Street Journal, the new tariffs will affect some $2.4 billion in goods across 40 states.  California, an important supplier of fresh fruits, dried fruits and nuts to Mexico, will be hit the hardest.

 

A 45 percent duty will be imposed on table grapes at the Mexican border; almonds, juices and wine, among other agricultural products, will pay 20 percent.  Some 90 percent of Christmas-tree exports from California and 65 percent from Oregon go to Mexico.  The volume of these exports will likely decrease beneath a 20 percent tariff.

 

Under the new tariffs, American pears, which are mostly shipped from Oregon and Washington states, now face a 20 percent tariff, as do a host of paper products from the Pacific Northwest and Wisconsin.  Southern and western states will not be the only ones affected by the trade war.  New York's $24 million annual exports in personal hygiene products or its exports of $250 million in precious-metals jewelry will not be as competitive after it pays a 20 percent tariff.  Nor will Wisconsin's scrap battery industry, which exports $128 million annually to Mexico.

 

Background on NAFTA

 

The North American Free Trade Agreement established a schedule for the gradual phasing out of tariffs and the elimination of trade barriers, with the main goal of expanding trade and investment among Canada, Mexico and the United States.  NAFTA's adoption and eventual implementation on Jan. 1, 1994, has led to a marked increase in multilateral trade and investment among the three countries.  Canada is now Mexico's second-biggest export market, and Mexico is our third.  Canadian exports to Mexico have quadrupled since 1993.

 

During the same time period, cross-border investment has also dramatically increased. Canadian investment in Mexico, for instance, has grown to about $5 billion, 20 times what it was in 1990.  From 1990 to 2003, Canadian investment in the U.S. more than tripled to $198 billion, and U.S. investments in Canada soared 150 percent to $215 billion.

 

With the cost of imported U.S. products now higher, Mexicans will likely substitute products from Canada, Europe and Latin America for these U.S. brands.  According to the Commerce Department, in 2008, the U.S. and Mexico had $368 billion in total trade, making Mexico the third-largest U.S. trading partner after Canada and China.  While Americans wait for Washington to refocus on its NAFTA commitments, U.S. exporters will lose significant market share as a result of the Mexican tariffs.

 

Addressing the urgency of these retaliatory tariffs, President Barack Obama met with Mexican President Felipe Calderon on April 16, 2009, and some news sources have reported that President Obama may be on the verge of reviving the controversial cross-border trucking program.

 

For more information on NAFTA, cross-border trucking or transportation issues, please contact Brian Del Gatto (Partner-Connecticut and White Plains) at brian.delgatto@wilsonelser.com or 203.388.9100; or Aide C. Ontiveros (Of Counsel-Los Angeles) at aide.ontiveros@wilsonelser.com or 213.443.5100.

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