The Impact of Tariffs on Mexican Relocation and US Supply Chains
Recent discussions about potential tariffs on Mexico have sparked concerns among many about the possibility of companies relocating operations from Mexico to the United States. However, the likelihood of a significant shift in company locations is rather slim. Several factors contribute to this conclusion, and in this article, we will explore why companies are unlikely to relocate due to tariff changes and the broader implications for supply chains.
Relocation Costs and Economic Commitments
Companies that moved to Mexico did so with significant investments in factory setup, infrastructure development, and employee training. These initial costs are substantial and are not quickly or easily reversed. As such, relocating would require companies to incur these costs once again, which is a financially daunting proposition. Even a 25% tariff, while a significant figure, may not be enough to override the initial economic investment companies made for their existing operations in Mexico.
Furthermore, there are other factors to consider. Political uncertainty can further deter companies from relocating. The unpredictability of US policy, including the possibility of a re-elected President Trump who has previously imposed tariffs, adds to the risk of relocating. Companies are likely to consider the long-term implications and additional setup costs before undergoing such a major shift.
Cost Considerations and Long-Term Benefits
Contrary to popular belief, labor costs in the United States are not drastically lower than those in Mexico. In fact, while labor costs in Mexico might be as low as a few dollars an hour, they can still be significantly cheaper compared to the minimum wage ($7.25 per hour as of 2023) in the US, which increases substantially when benefits are included. A pay rate in Mexico of 50-75 dollars plus benefits is still a significant cost saving, making it difficult for companies to justify relocation solely based on tariffs.
The situation is further complicated by the fact that tariffs are actually absorbed by the end consumer, not the original manufacturer. This means that the end user, you and I, pay the increased costs, not the American importers. Imposing tariffs in an attempt to 'bring them to their knees' is not a viable strategy, as other countries will respond with their own tariffs.
The Impact on the US-Economic and Political Arena
The US has a history of being a 'faithless negotiator.' Deals made with the US may include last-minute additions of new provisions that are not honored after the deal is signed. This practice only reinforces the notion that the US is unreliable in its agreements and that any strategies reliant on such cooperation are risky. Trust and reliability are crucial in international trade, and the US's inconsistent approach can undermine these principles.
Ultimately, the broader implications of tariffs extend beyond immediate cost savings for individual companies. The relocation of manufacturing operations can have a wide-ranging impact on the entire supply chain, affecting not just companies but also local economies that have developed around these industries. The complexity of international trade agreements makes it difficult for any single country to unilaterally change the balance of trade without significant pushback.
Conclusion
In conclusion, while the idea of relocating operations due to tariffs is tempting, the actual likelihood of significant companies moving their operations back to the US is relatively low. The initial setup costs, political uncertainty, and the broader implications on supply chains make relocation a costly and risky proposition. Instead, the focus should be on fostering stable and mutually beneficial trade relationships that can withstand changing political landscapes.