Less than a year later, Mexico has once again announced an increase in tariffs on certain imported goods.

Mexican President López recently signed a decree to increase the most-favored-nation tariffs on a variety of imported products, including steel, aluminum, textiles and apparel, footwear, wood, plastics and their manufactured goods, chemicals, paper and cardboard, ceramics, glass products, electrical materials, transportation equipment, musical instruments, etc., with tax rates ranging from 5% to 50%, effective from April 23rd.

Previously, on August 15, 2023, Mexico had announced an increase in import tariffs on products such as steel and aluminum, with rates between 5% and 25%. This latest tariff increase is a further adjustment to the tariffs that were raised in August 2023.

As before, Mexico has excluded taxation on countries that have Free Trade Agreements (FTAs) with it, and there is currently no FTA between China and Mexico.

Sun Lei, a senior partner of the Dacheng Trade Remedy Law Firm, said in an interview with Yicai journalists that subjectively Mexico did not mention China in the relevant legislation, but objectively, China, South Korea, and India, which do not have FTAs with Mexico, are more significantly affected.

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He stated that for companies that import raw materials to Mexico for processing and then re-export, an increase in the cost of raw material procurement, with unchanged product prices, would lead to losses for the enterprises. For Chinese companies that have obtained the Manufacturing, Processing, and Export Services (IMMEX) program qualification, the impact is not significant, but obtaining IMMEX qualification is not easy, and overall, the "gold content" of Mexico's tariff increase measure is still quite high.

Li Meng, Director of the Center for Mexican and Central American Studies at the China Institute of Contemporary International Relations, told Yicai journalists that in order to maintain its position as the United States' largest trading partner: "Mexico's tariff adjustments have to some extent brought disadvantages to Chinese companies hoping to bypass Mexico to enter the U.S. market, but it should also be seen that the U.S.'s attempt to decouple from China through 'nearshoring' is difficult to achieve."

Why the increase?

Mexican Economy Minister Buerostrero stated that the goal of the Mexican government is to prevent unfair competition, "We see many products entering Mexico at very low prices and replacing our domestic producers." Buerostrero said that cheap imports are replacing Mexico's textile manufacturers, footwear manufacturers, and other manufacturers, and these imports come from countries that do not have FTAs with Mexico.

Sun Lei indicated that the Mexican government made the decision to raise tariffs mainly based on the following two reasons: first, global geopolitical issues, trade frictions, and nearshoring trade have impacted Mexico's national industrial chain; second, raising tariffs helps to attract industries and businesses with high added value.He explained that, although the Mexican government has made the aforementioned statements, the attitude of the United States, as Mexico's largest trading partner and the most significant contracting party to the USMCA agreement, is inevitably the greatest external influence on Mexico's trade policy formulation. This includes the continuous criticism from the U.S. government regarding the surge in Mexico's steel exports to the U.S.; the supportive stance of the U.S. government towards Mexico's tariff increase policy last year; and in February of this year, the U.S. Trade Representative (USTR) accused steel products from Mexico of having a large number of third-country tax-evasion products.

Sun Lei also told the reporter that, in his view, from Mexico's perspective, it would certainly be willing to accept the industrial transfer from China. "However, there is a lot of criticism from the U.S., especially regarding steel. The U.S. Trade Representative's Office has strongly criticized the significant increase in Mexico's steel exports to the U.S."

"And Mexico and the U.S. are naturally the seller and buyer, or the party B and party A relationship. Mexico had increased tariffs in August of last year, and this is a further adjustment for the tariff increase in August 2023. Although Mexico mentioned in the tariff increase bill various considerations such as attracting high-value-added industries and enterprises, nearshore trade, etc., I think the main goal is still to satisfy the U.S." Sun Lei stated.

Li Meng told the First Financial reporter that, from the explanation of the Mexican Ministry of Economy, the significant increase in tariffs by Mexico is to provide a fair market condition for domestic industries, to strongly support the domestic market, promote the development of related industries, and meet the requirements of "nearshoring." He believes that, in reality, Mexico's actions are more under pressure from the U.S., especially on the issue of steel and aluminum materials exported to the U.S. On one hand, they strive to avoid U.S. tariff sanctions on Mexico, and on the other hand, they hope to please the U.S. by reducing imports from China.

Li Meng explained to the reporter that, according to the Mexican official gazette, in the revision of the "General Import and Export Tariff Decree" that took effect in August of last year, round steel with a diameter less than 14 millimeters was made a major taxpayer, with the tax rate increased to 50%. At the same time, he also said that the factor of the U.S. election should be taken into account.

In February, U.S. Trade Representative Tai, in a video conference with Enrostro, once again accused Mexico of lacking transparency in steel and aluminum product exports to the U.S., emphasizing that Mexico has actually become a transit station for Chinese steel and aluminum products to enter the U.S. market tax-evasion, seriously endangering U.S. national security and market stability. Tai demanded that Mexico strictly control the import of related products. If Mexico continues to be negligent towards U.S. demands, the U.S. will reactivate the relevant provisions of Section 232, imposing additional tariffs of 25% and 10% on steel and aluminum products imported from Mexico, respectively.

According to Li Meng's review, Mexico has recently adjusted the import tax rates for steel and aluminum materials several times. For example, in March of this year, after concluding an anti-dumping investigation, Mexico imposed tariffs ranging from 3.68% to 12.35% on steel balls and nails imported from China, and additionally imposed a 31% temporary compensatory tax.

Impact on Investor Confidence

Currently, Mexico is China's second-largest trading partner in Latin America, and China is Mexico's second-largest global trading partner.

Sun Lei told the reporter that since 2018, the global supply chain has undergone profound changes. "Regional free trade policy arrangements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the United States-Mexico-Canada Agreement (USMCA) have also prompted Chinese enterprises to increasingly transfer investments across borders to Mexico. Mexico's increase in import tariffs on China is not conducive to Mexico's acceptance of China's industrial and supply chain transfer." He stated that, in fact, since joining the World Trade Organization (WTO) in 1995, Mexico has made relatively frequent adjustments to tariffs over nearly 30 years.He explained that foreign investors targeting Mexico for investment also find it difficult to predict the cost of imported materials, which is not conducive to Mexico's integration into the global supply chain system.

"The key premise for business operations is predictability. Companies need to conduct feasibility analyses on profitability based on procurement costs and product selling prices before investing. However, if the cost of raw materials fluctuates significantly while product prices remain unchanged, it will increase the uncertainty of operations and weaken the willingness of companies to invest," said Sun Lei.

Li Meng also believes: "Under the joint influence of US pressure and protectionism, Mexico's repeated adjustments to its external tariff practices will, on the one hand, lose credibility with trade partners, damage cooperative relationships, and be detrimental to Mexico's ability to take on the global supply chain. On the other hand, it will also lead to price increases for domestic related products due to supply shortages, which is not conducive to market stability."

Li Meng added that, as a member of the USMCA, Mexico has always regarded the North American region as the foundation of its economic development, and maintaining the US market and seizing the benefits of "nearshoring" are the top priorities of Mexico's foreign economic policy.

At the routine press conference held by the Ministry of Commerce in September 2023, spokesperson He Yadong told reporters from First Financial that China has noticed that since August 16, 2023, Mexico has increased import tariffs on 392 tariff code products from countries and regions with which it has not signed a free trade agreement.

"This measure, although not targeted at any specific country, has to some extent affected trade between China and Mexico. At the same time, the overall increase in Mexico's tariff levels will also affect investor confidence, and China is highly concerned about this," He Yadong said, adding that based on historical experience, raising tariff levels will increase the production costs of downstream industries and reduce consumer welfare. Mexico is a beneficiary of free trade, and it is hoped that the Mexican side will adhere to the principles of free trade and use such measures cautiously.

Can Chinese companies avoid this?

Sun Lei reminded that the current IMMEX program allows foreign manufacturers to import raw materials and components into Mexico for processing without paying tariffs and value-added tax. Foreign-invested enterprises can use this program to avoid tariffs.

In simple terms, the program allows foreign manufacturers to import raw materials and parts into Mexico in a "deferred tax payment" form, but the condition is that all finished products must be exported from Mexico within the time limit set by the government.

However, to enjoy the tax-free policy in the IMMEX program, companies must first apply for IMMEX qualification. It is understood that the process of applying for IMMEX qualification is lengthy and the requirements are relatively strict. Companies must pay taxes before obtaining IMMEX qualification, and then apply for a tax refund after obtaining it. Similarly, the process of applying for a tax refund is still cumbersome and time-consuming.However, even in this scenario, Mexican importers and domestic companies will directly feel the pressure of operations due to increased management and compliance costs.

According to the analysis by the joint international trade remedy lawyer team of Dacheng and Meiri MMM, the operational and compliance costs faced by enterprises include: first, the determination and verification management of the country of origin of imported goods from free trade agreement countries; second, domestic and foreign-funded enterprises enjoying IMMEX in Mexico need to increase the compliance monitoring of imported materials; third, Mexican export companies that use non-regional raw materials to process finished products and then export to the United States will inevitably face stricter compliance supervision and enforcement measures under the USMCA preferential origin regulations of the United States.