That's A Lot of Pesos
I was curious this morning about what exactly a 5-25% tariff on all Mexican imports would mean and who would get hurt the most.
The biggest problem is that Mexican imports are concentrated in consumer durables and industrial/capital goods, which are already in very problematic territory with poor demand, high inventories, and cratering prices. Companies in these industries are already struggling, and adding 5% to many of their cost of goods line items will not be helpful.
There is also a lively cross-border trade in petroleum and refined products that will also be disrupted.
No one will be more affected by this than the auto companies, who have built up North American supply chains where raw materials, parts, and finished autos cross borders multiple times.
Numbers from 2018 annual:
A 5% tariff will be a huge tax on US corporations and consumers equaling 4.5% of all the GDP growth in the previous year.
Overall, this represents a $17.3 billion increase in duties from Mexico - over 2,000% - with motor vehicles taking the biggest hit to the tune of $4.7 billion, a 6,000% increase in duties. If it goes to 25%, that's $87 billion or 22% of the previous 4 quarters of GDP growth. Stay away from US autos until this is resolved.
The food is mostly fruits and vegetables, so look for 5% bumps in prices in your produce section.
Digging down into the splits, we see a variety of consumer durables and capital/industrial goods leading the way.
Did I mention? Stay away from US automakers. The whole supply chain is screwed if this goes through, and we will see more trouble in exports. It will also add $722 million a year to crude oil costs.
Also, as we see, industrial and capital goods feature prominently.
When we turn to exports, many of the same industries show up. This is all part of one giant North American supply chain in durables, and raw materials, parts, and finished products can cross borders multiple times. An example:
A barrel of crude oil is pumped in a Mexican oilfield and is imported into the US and winds up in a storage facility near Houston. A petrochemical manufacturer in the region buys that barrel and makes plastic granules with it. They are shipped to a factory in Mexico where they are turned into hoses. Those hoses get shipped to an assembly plant in Ohio, where they become parts of vehicles. Those vehicles are shipped to dealers in the Toronto area for sale there.
Those petroleum molecules crossed borders 4 times and would be subject to 3 new duties if the US goes through with tariffs and Mexico were to respond in kind. Moreover, look at how many hands touched it:
- Oil transportation
- Storage facility
- Petrochemical manufacturer
- Plastics transportation
- Hose factory
- Hose transportation
- Assembly plant
- Vehicle transportation
- Auto dealer
Everybody gets higher costs.
Let's look at what a 5% retaliatory tariff looks like:
As usual, US farmers get screwed. Cereal grain producers are at the top of the list.
But beyond that, the cost of US exports in Mexico would go up $13 billion. Of note, refined petroleum and petrochemicals/plastics really take it on the chin, all bad for Texas. Don't mess with Texas.
But the situation for the auto companies is the most scary. Since NAFTA passed, they have created an intricate supply chain that is now being broken. It would take many years and huge capital spends to recreate it all domestically or in Canada.
These tariffs can be a massive blow to the entire auto industry and not just Ford (F) and GM (GM). Remember that Toyota (NYSE:TM), BMW (OTCPK:BMWYY), and other "foreign" automakers assemble many of their autos here in the US. They will also be affected. The distinction between "domestic" and "import" is becoming meaningless.
The US auto industry right now. IFCAR
Stay away. The US auto industry is plagued by troubles before this, and this would be a huge additional blow to the way they do business.
The context: from July 2018 through March 2019, US GDP grew at 2.86% annualized. 84% of that growth went into warehouses and car lots as added inventory and was still sitting there at the end of March. The entire rest of the US economy only grew at 0.47%, near recessionary.
About a third of the new inventories are light trucks and SUVs, about 50-50 new and used. Likely many of these are last year's model and will only sell at deep discounts.
Added to their troubles is a recent trend of US consumers preferring used light trucks and SUVs over every other category. To meet demand, dealers have to give better trade-in value for used vehicles, thinning margins all around.
And the micro-mobility trend will also not help. Those electric scooters on the corner are not going anywhere and are bad news for automakers.
The other two thirds of added inventories are heavily weighted towards consumer durables and capital and industrial goods, many of the same categories that show up in our Mexico trade tables. This will only add to their troubles as they try to rectify the situation.
We can only hope that, like the empty Twitter threat earlier this year to shut down the border, this will turn out to be more sound and fury, signifying nothing. But if it isn't and a 5% tariff all of a sudden is a 25% tariff, you can multiply all those numbers by five - a total tax on US consumers and companies to the tune of $87 billion - about a fifth of annual GDP growth.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.