Let them eat . . . queso?
On July 5, Mexico is scheduled to turn the screws on tariffs applied this month to Washington’s nearly $400m in cheese exports to its southern neighbour. Duties on some cheesy comestibles are due to double to 20 per cent or ratchet up to 25 per cent — a painful prospect for the US, which sends about 80 per cent of its cheese exports south of the border. Indeed, Mexico is America’s top cheese market, accounting for more than a quarter of its total cheese exports.
As tariffs bite, Mexico could feel a little Schadenfreude. It knows only too well the feeling of over-reliance on its next-door neighbour — although in Mexico’s case, the situation is worse because 80 per cent of all its exports, not just one category such as cheese, are exported to the US.
Unless the trade tensions can be defused quickly — and there is no sign that that is the case — the US is going to have to scramble to find new markets for its cheese. Mexico has been doing that exercise too — looking to line up grain imports, for example, from Brazil and Argentina — in the event that US president Donald Trump finally pulls the plug on the North American Free Trade Agreement.
“They have a six-month window,” said Tom Bailey, dairy analyst at Rabobank. “I estimate Mexico is covered [in terms of cheese needs] for six months. That’s the tipping point when tariffs will start to have an impact.”
The last time Mexico took aim at cheese, during a trucking dispute with the US nearly a decade ago, US cheese exports only ended up falling 1 per cent, Mr Bailey said. But higher cheese prices and the fact that Mexico and the EU have just agreed an updated free trade agreement — in which one of the final hurdles was, ironically, cheese — means that this time round “Mexico has more leverage and more options. We could see more of an impact on the US,” Mr Bailey said.
American consumers will either have to eat more cheese, or the dairy industry will have to find new markets — something that, as Mexico knows, cannot be achieved overnight.
Mexico, meanwhile, has the luxury of boosting imports from other suppliers such as New Zealand, after it signed the updated Trans-Pacific Partnership, which the US ditched. Mexico has developed a taste for US-style cheese, which is different to that from grass-fed Kiwi cows, and logistically it does not make sense — the US is the natural supplier. But for Mexico, it is nice to have options.
Mexican consumers, finally seeing inflation on a downward trend, are unlikely to want to pay higher prices for US Cheddar, Monterey Jack, Gouda and the like. Meanwhile, the tariff increases are set to take effect four days after presidential elections that Andrés Manuel López Obrador, a fervent nationalist, is on course to win commandingly. He likes to say that the best foreign policy is domestic policy, and the countryside is Mexico’s best factory. He would, presumably, not be upset at his compatriots having to eschew Cheddar in favour of Queso Oaxaca.
America’s dairy industry is increasingly reliant on exports — indeed exports to Mexico increased 8 per cent in value last year — and the US Dairy Export Council says the industry supports 3m jobs. “Tariffs on cheese will potentially eliminate the competitive advantage we have in our No 1 market,” Tom Vilsack, the council’s president, said in a statement. “That is a legitimate concern.”
But Mexico already has an even bigger prey in its sights if the trade skirmishes go nuclear.
If the US ends up finally putting tariffs on autos, something that analysts say would kill Nafta, Mexico’s last-ditch weapon is to hit back with tariffs on about $4bn of corn and soy imports, according to sector officials.
That is a risky, double-edged sword because it needs those grains to fatten its domestic livestock to maintain a competitive advantage having already slapped tariffs on US pork. So for now, it is a weapon that Mexico is keeping in reserve.