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11062019

Under tariff threat, Mexico less attractive to companies avoiding China trade war

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News about the tariff plan trump shook the Mexican peso and questioned the future ratification of the new North American trade agreement, a treaty revised during several months of painful negotiations previously required by the US president.

Just at the time when companies thought that a bargain made Mexico a tempting production alternative to China, Washington ’s new threats once again unbalanced.

Take the recent experience of the Tecma Group, an outsourcing company, in which there was a surge in interest from companies planning to move to Mexico, as Trump raised tariffs to 25% by $ 200 billion in Chinese goods.

According to Alan Russell, its chief executive officer and chairman, Tecma, which operates about 75 factories in Mexico, was "weekly" contacted by companies selling goods from furniture to ink pens looking for a way from China to Mexico.

Now, after Trump promised to introduce rising tariffs of 5% on all Mexican exports to the United States from Monday, if Mexico does not restrain the flow of migrants to the US border, these expected investments risk being frozen, says Russell,

"The board of directors is not going to say:" Yes, let's do it ”under the conditions of a 25 percent tariff,” said Russell.

Few figures are available to assess how widespread the transition to Mexico is from China. But evidence that Mexico is becoming the leading US trading partner as China exports less to the United States, combined with unconfirmed data, shows a significant trend.

Fuling Global Inc., a specialized plastics and paper manufacturer that launches manufacturing operations in the northern Mexican city of Monterrey, suffered a similar blow.

The company said in an April letter that the planned plant "will help reduce a significant portion of China-U.S exposure." trade changes. "

Now it sounds outdated, but the company downplays concerns about Trump's latest change.

"Whatever we do in Mexico, this is for the long-term strategic growth of our company ... If we produce in Mexico, we will save a lot on freight and this will shorten the time for delivery. This is a huge advantage, ”said CFO Gilbert Lee.

If Trump copes with his tariff threat, Lee said that Fuling and his customers will initially bear the burden of costs, but ultimately "consumers will have to pay for it."

Similarly, the camera maker GoPro Inc decided in early May to transfer most of its products to the USA to Mexico from China in order to "shield us from possible tariffs,” then CFO Brian McGee told investors.

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A GoPro spokesman said that the company is currently "closely following” the continuation of negotiations on an immigration transaction.

As a sign that such cases were part of a wider surge of interest in manufacturing in Mexico, the Southwestern McQuly Bi-national Industrial Association said that in the past six months, about 10 firms that expressed interest in investing in Mexico heard it, compared to 3 4 previous months, according to Gustavo Gonzalez, the president of the organization.

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In fact, according to the US Census Bureau, Mexico overtook China and Canada in the first quarter of 2019 and became the main US trade partner for products.

Supplies from Mexico to the United States rose 5.4% in the first quarter, while shipments from China decreased by 13.9%.

UBS Bank said Mexico gained market share from China, selling products from the US tariff list for September 2018.

Companies already established in Mexico are concerned, but they say that it is too early to assess the impact of the new dispute.

They include manufacturers such as LG Electronics, which migrated a few years ago to build TVs in Mexico using imported components and send them to the United States without tariffs according to NAFTA.

The potential of US tariffs on all imports from Mexico can shake this supply chain and others like it.

Tariff uncertainty may induce companies to suspend their investment decisions in Mexico, said Gabriela Sony, investment director at UBS Global Wealth Management in Mexico.

"But if this is only 5% of the tariff instead of 25%, it may not change the game, because the peso has also depreciated,” she said.




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