Border Tax – Mexico Win or Loss?
There has been much discussion in the media concerning the a border tax and its effect on international trade. Of importance to us is the potential effect on our clients.
The current administration is questioning if restrictions of trade is the key to job creation in the U.S. The question is how to implement such restrictions if such findings prove to be beneficial to US job creation.
Some ideas have been created, of which border tax is one:
- 20% Import tax (duty) on all goods imported from Mexico
- 20 % Percent Import Tax of Companies Moving Jobs to Mexico
- The elimination of NAFTA
- The renegotiation of NAFA
- 20% Border tax (duty) on all goods imported into the United States.
These ideas have created chatter, opposition voices have started and are becoming loader. Chatter on this subject is coming, not only from Mexico, but from other countries in Europe, Asia and virtually the entire planet.
The worldwide community will not accept pressure from the U.S. and will most likely take action to counter any U.S. protectionism. The role of the World Trades Organization (WTO), intergovernmental organization which regulates international trade, is also important to note. The WTO will ensure that the U.S. abides by previously signed agreements, and will not let the U.S. impose unilateral duties.
It is important to note that although the President can issue executive orders immediately imposing duties on certain companies and countries that these duties will be challenged in court. He also needs the support of Congress to pass permanent legislation, and support for such legislation is dwindling as the true impact of such changes is understood.
In the Worst Case
Let’s assume the President calls for renegotiation of NAFTA and NAFTA is terminated after the required six-month period. The President then executes an executive order sighting an economic emergency, imposing a 20% tariff on all goods imported from Mexico. The various companies involved and Mexico bring suit in the U.S. and WTO to halt the executive order sighting that there is no emergency, and that the tariff is punitive and unfair.
The rulings in the U.S. and WTO prevail and an overall Mexico Border Tax no greater than 2.7% for ‘most favored nations’ status is imposed by the U.S. on goods imported from Mexico, as allowable by the WTO. Companies that utilize U.S. goods in their operations in Mexico import their finished goods into the United States under the provisions of the 9802 Program. This program allows U.S. components to be exempted from duties, with only foreign content being subject to the max 2.7% duty. This is what I see as the worst case scenario for the Mexico Border Tax.
Most Probable Case
President Trump calls for renegotiation of NAFTA with Canada and Mexico. The negotiations may focus on the rules of origin, which is currently a loop hole that allows non-North American raw materials to enter into North America at preferential or free duty treatment; Asia being the most visible benefactor.
The materials are then assembled into a finished article. Because the finished article was under the rules of origin there is no duty. Negotiations are underway on a modification to NAFTA requiring a finished article to meet a minimum local content rule for the finished article to qualify under NAFTA for duty free treatment. This will drive more production from outside of NAFTA to the U.S., Mexico, and Canada.
CFO, Tecma Group of Companies