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Mexican Tariffs: 7 Ways to Soften the Blow

June 7, 2019
Manufacturers can take actions now.

Last week President Trump announced a plan to impose tariffs on all goods from Mexico starting on June 10. The tariffs begin at 5%, increasing 5% per month until reaching a maximum of 25% in October.

The impact of this threat will be felt most acutely in the automotive sector—which is already struggling with increased tariffs on steel and aluminum—and a steep decline in auto sales in China. According to U.S. government trade statistics, the U.S. imported $59 billion in auto parts and 2.7 million cars worth an additional $52 billion from Mexico last year.

If U.S./Mexico diplomatic efforts do not resolve the issue, court or legislative challenges may be pursued contesting the rationale. But until the tariff issue is resolved one way or another, importing from Mexico will be high-risk for manufacturers.

Here are seven actions you can take today to minimize the impact:

1. Ensure your voice is heard in Washington. Call or write your elected officials and let them know the impact of this decision on your company. Work with industry trade groups who lobby for free trade.

2. Support a dedicated trade and compliance group at your company comprised of legal, tax, finance and supply chain personnel and, ideally, specialists in trade compliance. Allow them time to focus on running “what if” trade scenarios, to analyze different sourcing alternatives and to explore tariff engineering possibilities.

3. Work with your trucking suppliers to have cargo ready sooner and transport it as quickly as possible, as the tariffs go up over time and trucking rates are increasing as well due to slower crossing times. At the border in El Paso, the number of daily bridge turns per truck has declined, due to a reduced Customs and Border Patrol presence and increased enforcement activity.

4. C-TPAT (the Customs-Trade Partnership Against Terrorism) certification is a must if you want your loads to be the loads quality carriers want to haul.

5. Review your supplier and customer contracts for price escalation clauses that allow for increases in the agreed-upon price as taxes and governmental fees increase. With suppliers, review the contract terms pertaining to rate escalation prior to accepting any cost increase. With your own clients, you’ll want to invoke the escalation language if the provision was negotiated as part of your agreement. If the current contracts aren’t favorable and can’t be renegotiated, minimize your risk by reducing the size of future purchase orders and by shortening the validity period of client quotations.

6. Reduce the quantity of cargo you clear into the U.S. If you export some of the cargo you import from Mexico today, there are several ways to eliminate duty on that cargo. You can move the goods into a Free Trade Zone for shipment assembly and export them later, without paying duty. In El Paso, Free Trade Zone space is extremely tight, but I’ve been told by Marcos Lozano, owner of LCS LLC, that land for a new zone has been identified, and that the El Paso/Ciudad Juarez business community is working together to meet increased demand. A second option is to truck the goods in bond from the U.S. border to the U.S. airport or ocean port of departure. Or, cargo can be exported directly from a Mexican port to its final destination.

7. Reduce the dollar value of goods against which duty will be assessed. Under the 9802 exemption program, an importer may reduce the dutiable value by deducting from the entered value the value of any U.S. content. Have your trade compliance team and transfer-pricing group review today’s pricing methodology and record-keeping. Evaluate whether the 9802 exemption program makes sense for your situation, and if so, ensure the correct amount of U.S. value will be deducted.

Since this situation is extraordinarily fluid, changing literally on a daily basis, managers must closely monitor and adapt to developments up to and including the times that decisions are taken. It’s not easy navigating the current trade environment, but by employing a broad range of trade tactics, your company can make the best of a difficult situation.

Lauren Pittelli is the founder and principal of Baker Logistics Consulting Services, a firm focused on international trade and transportation issues. Prior to starting Baker, Lauren spent 30 years at leading freight-forwarding companies such as CEVA Logistics, Kuehne + Nagel and Panalpina, managing their international transportation, customs and contract logistics business in the Midwest. Most recently the U.S. CEO for GEFCO Forwarding USA, Lauren also is experienced in the challenges of smaller start-ups. She is a graduate of Harvard College and a licensed U.S. Customs House broker.

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