Issue No. 6

The Real Culprit Is China, So Why Is President Trump Placing Tariffs on His Partner Mexico?

The fits and starts over tariffs are confusing, but these duties are deadly serious. They affect not just economic conditions but global security. (Here is an excellent Washington Post infographic presentation of all the tariffs threatened, imposed or postponed.)

Unlike Canada and the European Union, Mexico has not retaliated against the 25% steel and aluminum tariffs that the U.S. imposed on March 12. Instead, Mexico is negotiating with top U.S. officials to find a way to remove the duties.

We don’t know what is happening in those negotiations, but we have a suggestion: Establish a unified North American agenda to increase jobs and economic growth and, at the same time, stand firmly against countries that have unfairly benefited from our markets.

In the next few days, North America – especially the U.S. and Mexico – should be working together to constrain the real trade culprit: China and its surrogates.

It is critical to understand why China is at the root of what can only be called a long-running crisis in steel. As the OECD, the organization of the world’s wealthy countries, reported when its steel committee met in November,

Exports of unfairly traded steel and steel-intensive products, including from sources of excess capacity, are flooding international markets, and trade actions are escalating.

China produces more than half the world’s steel today – over 1,000 million metric tons (MMT) – and is home to 7 of the 10 largest steel companies. North America produces 105 MMT and is home to none. With its economic problems at home, China can’t use all the steel it manufactures, and its exports are enormous, doubling between 2020 and 2024. China now ships as much steel to foreigners as the U.S., Mexico and Canada produce, combined.

For reasons of domestic politics and economics, the Chinese government heavily subsidizes steel production. As the OECD reported:

New Steel Committee work shows that a typical Chinese steel firm receives 5-10 times more subsidies than a steel firm located in another country, through a variety of cash grants, below market borrowings and corporate income tax rebates. Chinese subsidies are channeled primarily towards state-owned enterprises, and to larger and more heavily indebted firms.

A study by the law firm Wiley Rein last year looked at three large Chinese steelmakers and found that their government had supported them with bailouts, interest-free loans, and subsidies for expansion. The study concluded:

Despite repeated pledges to reduce steel industry overcapacity, the Chinese government continues to systematically intervene to support both perpetuation of uncompetitive existing capacity and expansion of new capacity through state-directed mergers, relocations, and facility upgrades, all backed with generous financial and other support.

The result is excess capacity. Last year, the world produced about 2 billion metric tons (MMT) of steel. But production capacity exceeded that figure by about 600 million tons.

Excess capacity causes downward pressure on prices, increased pressure to export, and employment losses. Because steel companies’ profits are depressed, they don’t have the funds to modernize their plants – a particular difficulty for U.S. firms. (This is why U.S. Steel, once the largest company of any kind in the world, is eager to be purchased by Nippon Steel of Japan.)

Because China’s quasi-governmental steelmakers exist outside the market system, excess capacity doesn’t harm them. In fact, it helps them dominate the global steel market, driving competitors out of business.

China is not just a low-cost producer of steel; it also uses neighbors like Vietnam, which generally faces lower tariffs than China, as transshipment points for steel bound for other countries, including the United States. In fact, Vietnam, with a GDP that is less than 2% that of the U.S., is the number-one importer of Chinese steel. According to data from the American Iron and Steel Institute, Vietnam’s steel exports to the U.S. last year jumped 143% over 2023. The U.S. is the largest importer of steel from Vietnam; Mexico is the fifth-largest.

These facts about China, excess capacity, and surrogates are essential to crafting the right trade policy for steel.

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What Should Be Done to Tackle the Real Crisis in Steel Imports?

On March 28, RealClearMarkets, the popular platform for economic and financial news, published an opinion piece by James K. Glassman, former Under Secretary of State for Public Diplomacy in the George W. Bush Administration and now chairman of the Project to Advance North American Prosperity.

In the piece, Glassman laid out what he called “a sensible U.S. trade policy [that] would make North American self-sufficient in steel. Specifically, the policy would have the immediate goal of replacing the 10 million tons of steel that China and its surrogates like Vietnam export to the U.S. each year by increasing Mexican to the U.S. from the current 3.5 tons. He recommended these steps:

1. End steel tariffs against North American partners and go back to the USMCA regime that has benefited the regional trading bloc over the past five years.

2. Mexico raises its current tariffs on steel from China and its surrogates from an average of about 30% to 75%.

3. The U.S. and Canada raise their steel tariffs to the same level as Mexico.

4. All three North American partners “enforce a tough regime that would prevent any steel that is not melted and poured in their countries from taking advantage of zero tariffs under USMCA.”

5. Customs control and transparency mechanisms are strengtheened to combat transshipment and fraud.

6. The partners “work jointly on a capital-investment and job-creation program in the region to replace exports from other countries.”

Today, the U.S. produces about 80 million MMT of steel. Another 30 MMT is imported, with 10 MMT coming from Mexico and Canada. The North American partners have a complementary relationship when it comes to steel. The U.S. is unable to meet domestic demand on its own. But together the partners can build enough efficient capacity to replace the 20 MMT coming from non-USMCA countries – especially from China and surrogates – and then move on to become a steel-making global powerhouse.

This would be a winning strategy for the U.S. – in contrast to the strategy of bashing neighbors and friends with high tariffs that will harm their economies and make China the big winner.

As Glassman concludes, “If negotiations adopt a China-focused solution of this nature, they can help build a stronger North American steel industry without touching off a horrific regional trade war."

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Coming Soon: Devastating Tariffs on Vehicle Imports from Mexico and Canada, Higher Prices for U.S. Consumers, and Loss of Jobs for Workers

"A 25% tariff on imported cars could raise the price by $5K to $15K (assuming car values of $20K to $60K that are subject to tariffs for illustrative purposes, although we acknowledge some vehicles could fall outside this band)," Goldman Sachs autos analyst Mark Delaney warned on Friday.

On March 26, President Trump announced he would impose a 25% tariff on cars, trucks, and vehicle parts imported into the U.S. starting April 3. The New York Times reported:

Nearly half of all vehicles sold in the United States are imported, as well as nearly 60 percent of the parts in vehicles assembled in the United States. That means the tariffs could push up car prices significantly when inflation has already made cars and trucks more expensive for American consumers.

Trump justified the tariffs on national security grounds under Section 232 of the Trade Expansion Act of 1962. “I find,” said the presidential proclamation of March 26, “that imports of automobiles and certain automobile parts continue to threaten to impair the national security of the United States and deem it necessary and appropriate to impose tariffs…to adjust imports of automobiles and certain automobile parts so that such imports will not threaten to impair national security.”

How imports of GM SUVs from Mexico “impair national security” is not explained.

Over the last 30 years, North America has built a sophisticated supply chain of components – so complex that to call a car “Mexican-built” or “U.S.-built” is an absurd simplification. Trump’s aim is to drive automakers to make their parts and cars in the U.S., but disentangling the current manufacturing is a task that could take decades, leaving economic devastation in its wake.

As an example, the Times cites the Chevrolet Blazer, a popular sport utility vehicle made by General Motors. It is assembled in a plant in Mexico using engines and transmissions that are produced in the United States.”

In addition, a finished Nissan Altima rolls off the assembly lines of Tennessee and Mississippi, but “the turbocharged version of the car has a two-liter engine that comes from Japan, and a transmission made in a factory in Canada.” Most Toyota RAV4 utility vehicles are built in Canada with transmissions made in the U.S. They are then transported back to the U.S. to be sold.

Roughly one-third of the Blazer’s parts are made in Mexico, one-third in the U.S. and Canada, and one-third elsewhere.

Mexico accounts for nearly one-fourth of all U.S. imported vehicles. But no U.S. cars carry a Mexican label. Mexico’s 26 auto and parts plants are owned by giant global automakers like General Motors, Ford and Stellantis.

None of this should be alarming. None of this is a threat to the U.S. economy or national security. To the contrary. GM, Ford and the others opened plants in Mexico and Canada because they provide the most efficient and effective ways to build cars and trucks and compete in a crowded global marketplace.

Mexican production of U.S. autos is nothing new. As the Detroit News recently noted, “In 1925, Ford Motor Co. opened a new company in Mexico City and built its first assembly plant there five years later. The plant had 260 employees and produced five Model Ts a day. Over time, production expanded to include the Model A, Mercury Cougar and Ford Mustang.”

What’s new is the scope and complexity of production. Said K. Venkatesh Prasad, senior vice president of research at the Center for Automotive Research: “As you draw a line over the last 20 years or so, there’s been steady investments made in Canada and in Mexico by the Detroit Three, as you might expect, primarily for cost reasons, and in a gradually increasing manner of complexity.” 

Mexico, with its proximity to the U.S. market, its reliable logistics, and its productive workforce, was on track this year to become fifth-largest automaking nation in the world. “The automotive sector is one of Mexico’s most significant industries, comprising 3.6 percent of the nation’s Gross Domestic Product (GDP), 18 percent of the manufacturing GDP, and employing over one million people nationwide,” reports the U.S. International Trade Commission.

Tariffs of 25% on automobiles – as well as prospective retaliation – would be crushing to the economies of all three North American partners.

“Throwing away tens of thousands of jobs on both sides of the border will mean giving up North America’s auto leadership role,” Candace Laing, president of the Canadian Chamber of Commerce, said. “This tax hike puts plants and workers at risk for generations, if not forever.”

The New York Tines cited Jonathan Smoke, chief economist at Cox Automotive, a market research firm, as estimating that “tariffs would add $6,000 on average to the prices of cars made in Mexico or Canada.” A Goldman Sachs analyst said on March 28 that the tariffs would boost sticker prices by $5,000 to $15,000 for most auto imports. The price of cars made in the U.S. would similarly rise.

Smoke said that “higher prices would deter buyers and force automakers to curtail production. He estimated that U.S. factories would produce 20,000 fewer cars per week, or about 30 percent less than usual.”

So not only Mexican and Canadian but U.S. autoworkers would lose their jobs. General Motors stock dropped 11% from the time Trump announced the tariffs on March 26 to the close of the market the next day. If the purpose of the duties was to help U.S. businesses, investors certainly had a different opinion.

To stave of a disastrous decision, Mexican officials are working to carve out an exemption. “Mexican Economy Minister Marcelo Ebrard said negotiations were ongoing to ensure preferential treatment for Mexico,” Reuters reported on March 27.



"If they are going to change the system, if we are going to a system of such high tariffs, what we have to seek is a preferential treatment for Mexico in a way that we have conditions that protect our jobs and economic activity in Mexico," Ebrard said in a video that was played at President Claudia Sheinbaum’s morning press conference.

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Tariffs Are Now More Than a Pressure Tool

In earlier tariff threats and impositions, the Trump Administration stressed immigration issues and drug trafficking. Tariffs were seen as a tool to pressure Mexico and Canada to act at the border according to U.S. wishes. But the presidential order on steel made no mention of immigration and drugs, nor will the upcoming order on autos. The March 12 order on steel includes reversing tariff policies on countries that aren’t involved in these issues, such as Australia, Japan, South Korea, Ukraine, Germany and the United Kingdom.

It is clear to us that, as far as Mexico is concerned, the steel tariffs and vehicle and parts tariffs are based on economics – that is, a misguided reading of how the U.S. will benefit from duties on its North American partners. The consensus of economists is that tariffs are harmful to both importing and exporting nations.

President Trump also appears satisfied with the measures Mexico has taken on immigration and drugs. As Bloomberg reported on March 27:

The Mexican government stepped up its action on both fronts after Trump reentered office, in a bid to avoid a trade war. It sent an extra 10,000 troops to the border to enhance security, took in non-Mexican migrants expelled by American authorities, and extradited 29 people from Mexico accused of drug trafficking and other crimes to the US to face charges.

In addition, the amount of fentanyl seized at the US-Mexico border fell 40% in February from the prior month. That is the lowest level since December 2021, according to US Customs and Border Protection data.

Don’t be confused. The President has moved from using tariffs as a bludgeon to achieve other goals to using tariffs because he believes they are a major means of making the U.S. economy great again – a way to bring America back to the kind of prosperity of the Gilded Age of the late 19th and early 20th Century.

On March 14, Sen. Ted Cruz, Republican of Texas, said on a podcast, "I fully support the president using the threat of tariffs to incentivize Mexico and Canada to help secure the border. Now that being said, my home state of Texas does an enormous amount of trade with Mexico and Canada. Now that being said, my home state of Texas does an enormous amount of trade with Mexico and Canada. I don't want to see the long-term economic policy being big tariffs against Mexico and Canada.”

He added, “And so my hope is that those policies stay as an incentive rather than an ongoing features of economic policy.”



The incentivizing phrase, however, is clearly over. Perhaps Cruz and other Senators will now weigh in on how harmful economically driven tariffs will be to their states.