Last week, the U.S. government announced that it would impose steel and aluminum tariffs on a host of nations, including Mexico.
As expected, the Mexican government responded with its own tariffs on U.S. goods.
Heriberto Hernandez, president of Mexico’s leading pork producers association OPORPA, speaking shortly after a powow with Economy Minister Ildefonso Guajardo, announced that Mexico will slap a 20 percent tariff on U.S. pork imports, primarily legs and shoulders, as well as fresh and frozen.
The government has not issued an official statement about the tariff or meeting.
In 2017, Mexico imported 650,000 tonnes of pork legs and shoulders, worth more than $1 billion.
Leading pork producers (again, as expected), support the levy, arguing that “there are many alternatives” to U.S. suppliers. Some of these alternatives might be Canada or the European Union (EU), which are also targets of the Trump administration’s steel and aluminum tariffs.
Analysts are warning that pork prices in the U.S. are set to rise by as much as 15 percent as a result of the tit-for-tat tax.
It should be noted some tariffs are stupider than others, and some forms of protectionism are worse than others. There are stupid tariffs and very stupid tariffs. A very stupid tariff is a tariff on steel and aluminum that increases the costs of every product made in the USA that uses those metals. This increases consumer prices and makes products produced in the USA less competitive relative to those made outside the USA using steel and aluminum priced at the world market rather than the artificially propped-up, protected US steel market.
A less stupid tariff would be a retaliatory tariff that might be put on US motorcycles (Harley-Davidson (NYSE:HOG)) that will not raise any costs on any EU producers or raise prices for anyone in the EU, except for buyers of motorcycles. A truly frightening piece of news is that in order to exempt South Korea from the steel tariffs, an agreement establishing quotas may be undertaken. Even worse than the new steel and aluminum tariff proposals is the possibility of quotas. As I said in the article “BDCL With 15.9% Dividend Can Provide Diversification For Interest Rate Sensitive Portfolios”:
The worst form of protectionism comes in the form of quotas. Quotas are bilateral agreements, negotiated by governments which allocate shares of the market that thus restrict exports and imports. None of the higher prices on the restricted goods are remitted to governments as is the case with tariffs and border adjustment taxes. The losses to the consumers are allocated to the favored producers under a quota system. Prices are always higher and production is always lower under a quota regime than would be the case in a free market. Higher consumer prices leads to lower standards of living. Lower production always leads to less employment.
The worst impact of quotas is that firms involved have little or no incentive to innovate. If the amount they sell is determined by quotas, then the most important and desired employees of the firm are no longer the scientists and engineers would can come up with the best innovations and inventions. Rather the most sought after and highest paid employees of the firm become the politically connected lawyers and lobbyists who can influence the quota allocations in such a way to most benefit the firm.
Ominously, Trump favors bilateral trade talks as opposed to multinational agreements like NAFTA and the Transpacific Partnership. With bilateral trade talks, there is a much greater risk of quotas resulting. When only two countries are involved, it is possible that companies from both countries can agree to carve up their domestic markets among themselves and use quotas to enforce the market share arrangements. The losers are consumers in both countries. Multinational agreements are the only effective method of curtailing unfair trade practices. Quotas almost never appear in multinational agreements…”
https://seekingalpha.com/article/4164735