Mitigating the Impact of U.S. Tariffs on Mexico

  Mexican flag

The U.S. recently announced plans to gradually ramp up tariffs on certain imports from Mexico if certain conditions are not met by the Mexican government. Starting on June 10th, a 5% tariff on all Mexican imports would be imposed, growing 5% each month until peaking at 25% in October. As with the recent tariff increases on Chinese imports, the supply chain impact will be significant should these go into effect. It’s important to examine the potential impact and look for ways to mitigate any negative side effects.

The Short-Term Impact

Inventory Stockpiling

Some organizations have already begun plans to increase imports from Mexico in anticipation of the June 10 tariffs, trying to get ahead of the increase. The general idea is to import now while prices are still low and stockpile goods in U.S. warehouses. While this solution makes financial sense for certain industries and products, if the inventory is allowed through the border it will have its own ripple effect on cost and capacity.

Border Delays and Capacity Issues

The increased traffic is producing more delays at the border. Things are going to be choppy at first—there won’t be a total catastrophe on day one, but organizations are already looking to secure capacity to move goods in advance of the tariffs. Not only will this produce delays at the border, but it was make securing capacity more challenging and competitive. Warehouse space must also be considered—there is a finite amount. And we’re already seeing warehouse capacity concerns in the Southwest from the inventory pull forward in late 2018 and early 2019.

Increased Costs

As we’re all aware, when conditions like these arise—limited capacity, border delays, restrictions in warehouse space, and most importantly, an increase in the price of imports—the cost could be passed upstream to suppliers and downstream to consumers. When interviewed, some retailers already said they have plans to share the tariff increases with their supplier networks to mitigate the impact on their bottom line. Others might end up needing to pass that increase directly down to the consumer.

The Long-Term Impact

The effects the tariffs might have if the rate is allowed to continually increase through the summer and into October will be even more significant. Trade between the U.S. and Mexico has been healthy in recent years, but these tariffs will certainly add strain to that relationship.

The longer these tariffs stay in place, and perhaps more importantly, the higher they climb, the more likely it is that U.S. companies will find alternate sourcing for the goods they typically import. This could come in the form of finding new suppliers, either locally or in locations less expensive to import from, or it could go as far as companies relocating manufacturing out of Mexico. But you can’t just move a warehouse or plant overnight.

It’s worth noting that, according to FreightWaves, Port Laredo recently passed the Port of Los Angeles as the busiest trade hub in the nation for the first time in its 168-year history. This is significant because trade is down in the Port of Los Angeles as a result of the recent tariffs on China, and much of Laredo’s business (97%) comes from Mexico. There is plenty of reason to believe the new Tariffs on Mexico will have a similar impact on our supply networks and ports as those imposed on China.

Mitigating the Impact of the Mexico Tariffs

The big question on the minds of supply chain leaders is how they can manage this volatility in the short and long term. The best course of action is to use visibility technology to build a more visible, flexible, and cost-efficient supply chain.

Using Advanced Visibility technology to help track your shipments in real-time will help you and your supply chain partners identify possible delays before they happen at the borders. If you can preemptively identify and plan for delays resulting from tariff-related congestion and exceptions, you will be able to save money through more efficient planning and resource allocation. The depth of understanding you can gain about your supply chain through visibility analytics and insights can be used to create efficiencies that mitigate the impact of these tariffs.

Accessing Advanced Visibility also means gaining access to a larger capacity network. As organizations seek to increase their imports while tariffs are lower, the ability to secure capacity will be extremely important. Leveraging a large network with an automated dispatch function will give companies a distinct advantage.

Tariffs will always be a factor in the global supply chain. Thankfully, the steps that can be taken to mitigate their impact are steps that lead to a more cost-effective, efficient and transparent supply chain regardless of the current geopolitical climate. Building a supply chain strategy that centers around Advanced Visibility is an evergreen best practice.

Prepare your supply chain for global disruptions.