Trade Tariffs and Cross-Border Shipping – Part Three
Last Updated Aug 2, 2023
If you've been following along with our 5-part series on how trade tariffs impact the supply chain, welcome back! And if you are just joining us, we recommend reading through part 1 and part 2 as well.
So far, we have discussed what types of tariffs shippers deal with, and how they affect retailers in the US. In part three, we are looking at how manufacturers are most affected by those same tariffs. And we have to be honest with you... things aren't looking too good. Yep, we are talking about that nasty little term, trade deficits.
A deficit usually refers to a debt. But when we are discussing trade laws, a trade deficit means something completely different. A deficit in the world of international trade is simply defined as the when the cost of a country's imports exceeds the value of its exports. When this happens it is usually due to the importing country finding better value elsewhere for one reason or another.
And the industry hit the hardest by these trade deficits is manufacturing.
In 2018, trade between the United States and Mexico equated for nearly $672 billion dollars. The United States exported $299.1 billion worth of manufactured goods, while we imported $371.9 billion. The difference between the goods imported and exported was $72.7 billion, which is the trade deficit between Mexico and the US.
When we import more than we send to another country, it’s usually a sign that our manufacturing industry is not providing value to other countries. However, when tariffs increase between our two countries, the allure of importing United States manufactured goods into Mexico takes a dramatic downturn.
Did you know that Mexico is currently the 3rd largest goods trading partner with the United States?
Having said that, Mexico still depends on United States manufacturing as its largest supplier of many things. Some of our main exports to Mexico include machinery, mineral fuels, medical equipment, vehicle parts, and chemicals.
Each of these products while manufactured in the United States, doesn't originate here. Actually, most of the raw materials used in the production of these products are imported from Canada or China. And one important thing to keep in mind is that not all tariffs are created equal. Essentially, manufacturers are dealing with tariffs not only for acquiring raw materials but also to then export finished products.
When tariffs are consistent, however, the flow of commodities between the United States and Mexico is smooth. And since many large US-based companies including IBM, Coca Cola, and Ford, have manufacturing facility locations in Mexico - maintaining a consistent tariff level is incredibly important (and difficult).
What Happens to US Manufacturing when Tariff’s Increase?
As we stated in the previous two articles, a tariff is essentially a tax for the right to conduct business in the other country. When these tariffs increase, the manufacturer of the goods has to pay larger fees to sell their products to consumers or companies in another country.
Anytime a manufacturer spends more money to make a product, those additional costs fall to the consumer. If the consumer has options for choosing a different manufacturer with a lower cost product, they will usually choose the less expensive option. In the end, this means reduced sales for the manufacturer in the United States, which has a trickling down effect on the employees of the manufacturing company.
It is a classic snowball effect.
What Happens to US Manufacturing when Tariff’s Decrease?
In late 2018, the US, Canada, and Mexico entered into an agreement to create a free trade deal. This deal would expand exporting opportunities into Canada and Mexico for US farmers and poultry providers. This agreement was to ensure that tariffs for these consumables would remain at zero cost to the manufacturer.
If a manufacturer has to pay less for tariffs, it increases their profit margins, provides better opportunities for business, stimulates the local and national economy, and can increase jobs in both manufacturing and supply chain operations. And while this agreement has not yet been ratified, it does introduce an opportunity or platform for other trade deals to be established.
Once again, thank you for reading along with our series on trade tariffs.
Keep your eyes open and on the lookout for part 4 coming soon. While we have focused on how trade tariffs impact the US and Mexico, part 4 will be a bit different. In our next installment, we look at the effects of tariffs on the relationship between Canada and the US!