In a surprising move, Mexico has announced yet another increase in its import tariffs, only a few months after a previous adjustment. President López has signed a decree to raise tariffs on a wide array of products including steel, aluminum, textiles, apparel, footwear, wood, plastics, chemicals, paper, ceramics, glass products, electrical materials, transportation equipment, and musical instruments, with the new tariffs ranging from 5% to a staggering 50%. This significant hike aims to protect local industries from what the government describes as unfair competition.

This decision follows Mexico's earlier increase in tariffs made on August 15, 2023, which affected steel, aluminum, and various other products with tariffs set between 5% and 25%. The latest adjustment appears to be a continuation of that policy. Interestingly, the decree exempts countries that have Free Trade Agreements (FTAs) with Mexico, reflecting the longstanding issue of trade relations between Mexico and several other nations, notably China, Korea, and India, which currently lack such agreements.

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According to Sun Lei, a senior partner at Dachen Trade Relief Law Firm, while the decree does not explicitly mention China, it indirectly impacts countries like China, Korea, and India due to the lack of an FTA with Mexico. This situation places additional economic pressure on companies importing raw materials to Mexico for production and export. Higher raw material costs could lead to a scenario where companies have to absorb losses, especially if they cannot raise prices to match the new cost of goods sold.

However, the implications of this tariff hike are nuanced. Companies that are part of the IMMEX program, which permits qualified foreign companies to import raw materials and components exempt from tariffs and taxes for manufacturing and subsequent export, may not feel the impact as severely. Nonetheless, obtaining IMMEX certification can be a lengthy and complex process, presenting barriers for many businesses looking to take advantage of this exemption.

Li Meng, head of the Mexican and Central American studies at the China Institute of Contemporary International Relations, suggested that this move is part of Mexico's attempt to assert its position as the primary trade partner of the United States. The recent tariff adjustments could negatively affect Chinese companies that have considered bypassing tensions with the U.S. by routing goods through Mexico to access the American market. Despite this, he noted that the theory of separating Mexico from China through "nearshoring" is unlikely to bear fruit for the U.S.

The Mexican Secretary of Economy, Raquel Buenrostro, clarified that the motivation behind the tariff hikes is to combat unfair competition. She expressed concern about an influx of low-priced products from countries without an FTA with Mexico, which has been harming local manufacturers in various sectors, particularly textiles and footwear. The government’s intention is clear: to shield domestic producers from being undercut and to foster a more equitable trading environment.

Sun Lei elaborated on the government's rationale for raising tariffs, attributing it to the effects of global geopolitics, ongoing trade tensions, and a desire to bolster high-value industries within Mexico. Nevertheless, he pointed to the undeniable influence of the U.S. in Mexico's trade policy, particularly given that the U.S. is Mexico's largest trading partner and a significant force in the USMCA trade agreement. The U.S. has been critical of Mexico's steel exports and has previously threatened to reintroduction tariffs against Mexican goods should trade practices not align with U.S. expectations.

Under increasing pressure from the U.S., Mexico may feel compelled to adopt such measures to avoid trade conflicts, particularly regarding the steel and aluminum markets. This growth in imports has raised suspicions that Mexico is becoming a conduit for Chinese goods entering the U.S. without appropriate tariffs, a situation that the U.S. government is keen to address.

The fluctuations in tariff rates raise concerns among investors who are already grappling with the rapid changes in the global supply chain that started in 2018. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and USMCA have spurred many Chinese companies to invest in Mexico, yet the latest tariff hike could stifle this momentum, making Mexico a less appealing destination for investment.

Notably, uncertainties surrounding the cost of imported materials can deter investors, especially when faced with a dynamic political landscape that influences pricing stability. Sun Lei captured the essence of the problem, stating that predictability is crucial for business operations. If businesses find it challenging to forecast costs due to fluctuating tariffs, confidence in making investments will dwindle.

Li Meng expanded on this sentiment, stating that continuous adjustments in tariffs could damage Mexico's credibility with trade partners and disrupt cooperative relationships. He also pointed out that rising raw material costs due to tariffs could result in higher consumer prices, which counteracts the benefits intended by the government through protective measures.

While the U.S.-Mexico-Canada Agreement did provide a framework for trade, Mexico still has to tread carefully to maintain its position and relationships within the North American trading sphere. The strategy seems increasingly focused on appeasing U.S. interests and minimizing tariffs while maximizing exports to the U.S., particularly in the aftermath of increased scrutiny from American trade representatives.

In light of these tariff changes, Chinese enterprises could potentially circumvent some costs through the IMMEX program, which allows imports of materials without immediate tax liabilities, provided that all finished goods are exported within a specified timeframe. However, companies must first navigate the complex process of obtaining IMMEX certification, facing both intricate regulations and the financial burden of paying taxes upfront before claiming refunds.

Even with these provisions in place, internal Mexican businesses are likely to experience increased operational pressures and compliance costs due to the heightened complexity of managing tariffs and imports. The associated challenges with verifying the origin of imported products, ensuring compliance with Mexican regulations, and navigating the U.S. enforcement landscape under USMCA are exacerbating the current uncertainties businesses face.