Earlier this month Mexico announced new tariffs on some US exports, retaliating to duties that the US placed on imports of Mexican steel and aluminum. Within the dairy industry, these tariffs will most directly impact cheese trade between the two nations.
The new Mexican tariffs come on the back of President Trump's high-profile spat with Canada over high dairy tariffs. At the G-7 summit in Quebec last weekend he called attention to the fact that the US pays between 240% and 300% on dairy exports to the Canadian market, calling for a change to their tightly-controlled industry.
NAFTA negotiations play a role
Rabobank released a news brief on the situation with Mexico, explaining nearly all US cheese exports are now facing tariffs of 10% to 15% as of June 5, with a plan to be increased further to 20% to 25% on July 5.
The tariff rates seem low when compared to Canada, but could still have a huge impact on the US dairy bottom line. In 2017, cheese exported to Mexico from the US accounted for 28% of all US cheese exports and 80% of all Mexican cheese imports, according to the brief.
The last time Mexico placed tariffs on US cheese was a 14-month period beginning in 2010 when the two countries were arguing over Mexican trucks accessing US roadways. Export rates did not end up being drastically affected then, but this time may be different.
“Given the gravity of the situation in renegotiating NAFTA, I think our chances of not only seeing these tariffs remain in place are high, but we could expect to see more products added to them, possibly milk powders,” said Tom Bailey, senior dairy analyst at Rabobank RaboResearch and author of the brief.
What to expect on each side
According to Rabobank, Mexico is stocked with about six months’ worth of cheese. If the tariffs last longer than that, both countries would need to make big changes.
Mexico recently signed the revamped Mexico-EU FTA, and they may choose to expedite the reduction of tariffs on EU cheese as an alternative or sign a trade agreement with dairy-powerhouse New Zealand.
Milk and cheese in the US will eventually feel pricing pressure as it looks to find new markets for the dairy surplus. More importantly, this could have lasting implications for the US’ reputation as “a less reliable trade partner” on the global stage.
“Mexico is our largest export partner. As such this impacts the largest volume of US milk. Around 3% of all milk produced in the US was exported to Mexico in 2017,” said Bailey.
There could be an upside for the US, however.
“Good may actually come from the tariffs further down the road. It could force the US to explore new markets, decreasing reliance on NAFTA and China as export destinations, which could be a good thing,” said Bailey.
“The timing is very unfortunate, but it’s somewhat all related. I think it demonstrates that the countries we are negotiating trade with know where to put pressure on President Trump.”