A proposed new tariff on Mexican imports could have a devastating impact on California’s technology sector; the state imports a disproportionate amount of goods from the United States’ southern trading partner and conversely exports a large amount of products over the border.
President Trump on Thursday threatened a 5 percent tariff on all goods from Mexico starting June 10, unless Mexico sharply curtails immigration to the United States. The proposed tax could escalate to 25 percent by October. Because of U.S. manufacturing dependencies on Mexico, those moves could result in a devastating impact on overall supply chain and send U.S. inflation even higher than tariffs imposed by China, whose trade disputes with the United States have escalated into a trade war. The United States imports roughly $350 billion in Mexican goods (compared to $150 billion from China).
A 25 percent levy on Mexican goods could reduce U.S. gross domestic product by 1 percent in 2020, according to Oxford Economics U.S. economist Gregory Daco. He asserts that the impact to California’s economy could be particularly damaging. With roughly $44 billion of annual imports from Mexico, California is the third-largest importer of Mexican goods. One can expect retaliatory measures from Mexico that could threaten the $30.7 billion of exports California sends to Mexico each year, the majority being computer equipment and electronics. Figure A above shows further impact on state goods imported from Mexico, which could have a ripple effect across the nation.
One can expect retaliatory measures from Mexico that could threaten the $30.7 billion of exports California sends to Mexico each year, the majority being computer equipment and electronics.
Companies doing business with Mexico should consider measuring their exposure to bilateral trade and weigh tariff impacts in 5 percent increments to determine margin pressures due to increases in cost of goods sold, and the breaking point for boosting retail prices. Finding alternate supply chain sources could be worth looking into, as well as implementing or leveraging technology to improve overall efficiencies to offset the increases in cost.