Mexican Industry: Mexico Cannot Live With Section 232 Tariffs on Compliant Goods

"We are the only two countries in the world that benefit from partial free trade," Sergio Gomez Lora, who heads the U.S. office of Mexico's Business Coordinating Council, said earlier this week at the Hudson Institute.

But, he cautioned, there can be no USMCA if Mexican goods that meet USMCA rules of origin are still subject to 25% or 50% tariffs under Section 232.

"We recognize that the world has changed, we recognize that the U.S. has a new trade policy," he said, and no longer leads the charge for free trade.

He said Mexico is open to making a tighter rule of origin, so that inputs from China or other countries aren't able to benefit from duty-free status after minor assembly in the U.S.

However, he said, "Every product that complies … has to have the right to benefit from a zero tariff."

Assuming that the U.S. will back off its tariffs on Mexican-made cars, auto parts, metals and metal derivatives, there are areas Gomez Lora expects Mexico to change.

He expects Mexico to hike tariffs on Chinese goods (it already has on apparel) and improve monitoring the import of Chinese goods, making sure they aren't getting into the U.S. market after a small transformation. Gomez Lora also expects a revised rule of origin to touch on the owners of Mexican and Canadian producers, and to restrict Chinese ownership. He thinks Mexico will mirror U.S. export controls, and establish its own investment screening for national security.

But, he said, coordinating what Chinese products should be tariffed highly and which are not threats to important industries won't be easy.

Gomez Lora said top Mexican economic officials have been in Washington nearly every week the past few months.

"On the one hand, we all agree in North America, we need to put some limits to Chinese unfair practices and to state intervention that is affecting overcapacity and is affecting industries in the region. But on the other hand, … China is probably the only reliable source for so many key inputs…." He said if Mexico, Canada and the U.S. were to abruptly stop "importing from China, we will harm North American competitiveness."

He gave electronics as an example where there is no other reliable supplier for components.

"To add complexity to this equation, industry is different," he said. "The U.S. and Canada do not produce any longer clothing and shoes -- Mexico does. So Mexico is harmed by Chinese subsidies in textiles, while the U.S. could benefit from those."

These issues are on the table, "but we have a long way to go to finding solutions to these very complex challenges we’re facing," he said.

At least publicly, President Donald Trump has dismissed the idea that manufacturers need to source components from Mexico and Canada duty-free to be efficient and contain costs, and has said the U.S. doesn't need Canadian oil (which is the reason Canada has a trade surplus) and that he doesn't want Canada or Mexico to make cars sold in the U.S.

The Hudson Institute, however, framed the event to say that if Canada, Mexico and the U.S. deepen their economic ties in critical minerals, energy, advanced manufacturing and defense, it would improve North American economic security, and better position companies producing in any of the three countries to compete globally.

Hudson Institute Senior Fellow Erin O’Toole, former leader of Canada's Conservative Party, argued that Canada's potash supplies are needed for U.S. food security, and that its mineral reserves could, if mines expand, be part of energy and national security. U.S. firms had planned to invest in Canadian mines, but the sudden turnaround on the green transition has frozen those plans. A critical minerals Section 232 investigation could put up more hurdles to integrating critical minerals supply chains.

Hudson Institute Senior Fellow Thomas Duesterberg said cooperation among the three countries would lead to more efficiency.

He said there are reasons to believe "the extent of the tariffs we have imposed, if they continue, probably will do some real economic harm to the United States." Duesterberg said he thinks the emergency tariffs -- which apply 25% tariffs to most Canadian and Mexican goods that do not qualify for USMCA benefits -- will be thrown out in court, but also said, "I’m not a big fan of the 232 tariffs."

But he said he expects Trump will recognize the economic harm, and be "a little more flexible."

O'Toole also said he thinks Trump will have to adjust after price hikes and product shortages, and predicted the global tariff would drop to 8% in the fall.

Canada, at times, has tried to ally with the U.S. on China and portray Mexico as the weak link, and some of that dynamic was on display during the event. O'Toole said Mexico hid Chinese aluminum ingots in the desert and erroneously said Mexico has a free trade agreement with China.

Gomez Lora corrected him. Mexico was the last holdout to keep China out of the World Trade Organization, agreeing only after the U.S. president asked it directly to do so, he said. Gomez Lora said Mexico lost a lot of market share in the U.S. after China's accession.

"If it [were up to] us, China would never be in the trading system."