AIN Blog: U.S. Aero Industry Uneasy Over Trump's Mexico Tariff

 - May 1, 2017, 1:00 PM
French engine maker Safran has a factory in Mexico, as do many U.S. aerospace firms. But for American companies, a new 20 percent tariff on manufactured goods shipped north into the U.S. could be damaging to the viability of their supply chains. [Photo: Safran]

Some two dozen major aerospace and defense companies now have significant manufacturing operations in Mexico, and more than half of these are U.S.-based corporations. One has to wonder that when they decided on these long-term investments—in most cases, a decade or more ago—whether any of them contemplated the prospect of a U.S. President winning an election with promises to make it unsustainable for American manufacturers to build products in Mexico.

That is exactly what came to pass with the election of President Donald Trump, who, as his 100th day in office passed on Saturday, still had not delivered on his pledge to introduce a 20 percent tariff on manufactured goods imported into the U.S. from Mexico. The controversial tariff is partly intended to deter U.S. firms from setting up shop south of the Rio Grande and partly to find a way to compel the Mexican government to finance the construction of a wall along the entire length of the 2,000-mile border between the two countries.

In recent weeks, there has been little mention of the 20 percent tariff, but just this week Trump threatened to unilaterally pull the U.S. out of the North American Free Trade Agreement with Mexico and Canada. Within hours he backed down, indicating that he is willing to renegotiate NAFTA instead, only to then repeat the threat if the leaders of the U.S.’s neighboring countries refuse to agree to his terms.

So how concerned should U.S. aerospace and defense industries be that the business case for their Mexican operations could soon evaporate? The U.S. Aerospace Industries Association (AIA) has yet to take a definitive position on the threat of tariffs and the Trump Administration’s shifting trade policies.

We are working through a number of positions on trade, trade agreements, tax provisions and tariffs with respect to their impact on the free flow of goods and people,” commented AIA communications director Dan Stohr. “As with most—if not all—policy discussions, the devil is in the detail. How would such tariffs be implemented? Against what goods?  Are there alternative sources for parts and components coming from tariffed nations? It’s hard to say without concrete details on what the proposals would actually do.”

The planned 20 percent tariff on imports from Mexico no longer features among the policy position statements on the White House website. In its place is a more generic commitment to “trade deals that work for all Americans.”

But experts working closely with the aerospace and defense manufacturing sector in Mexico have acknowledged that the lack of clarity over the threat of tariffs is unsettling leading companies. “I don’t think anyone is viewing this as just political rhetoric,” said Doug Donahue, business development vice president at the Entrada Group, which helps companies to establish and run manufacturing facilities in Mexico.

Donahue told AIN that, as significant as Mexico now is in the aviation supply chain, he does not feel the value of cross-border trade conducted in the sector would justify specifically targeting the industry with the proposed tariff. “But the industry could still be hit if the tariffs cover general manufacturing. We don’t yet know whether [Trump] will do this in an industry-specific way,” he said.

Mexico’s peso currency tumbled in value against the U.S. dollar in the immediate aftermath of Trump’s November 2016 election victory. According to Donahue, the fall in the peso effectively compensated for the potential 20 percent tariff in lowering the price of goods produced in Mexico. He argued that the trend now could have a destabilizing effect if the tariff doesn’t get implemented.

Companies are worried and concerned by the generally deteriorating relationship between the U.S. and Mexico,” Donahue told AIN. “What businesses hate most is a lack of predictability, so for now they can’t take decisions on possible investments [in Mexico]. The real issue [for American industry] isn’t the U.S. versus Mexico; it’s automation versus the U.S. The trade deficit numbers quoted by the Trump Administration to justify tariffs only take account of goods, not services. The U.S. exports about $40 billion worth of services to Mexico.”

Some industry observers have argued that it would be far too costly for aerospace firms to now move manufacturing back to the U.S. And, even if they did, Donahue questions whether they would find enough suitably qualified employees to do work such as wire harness manufacturing. “A lot of this work is very labor intensive,” said Donahue. “If you can’t find enough labor or automate it, the cost to the consumer [i.e. airlines] will have to go up.”

Donahue warned that the American aerospace sector’s European and Japanese rivals are not waiting for the political uncertainty to clear in Washington, D.C. They are pressing ahead with investments in Mexico, and he argued that U.S. firms could “lose a foothold” and competitive advantage in a price-sensitive market if their position is undermined by costly tariffs.

Major aerospace and defense firms with manufacturing facilities in Mexico include Honeywell, Goodrich, Gulfstream, Textron, Rockwell Collins, Lockheed Martin, Northrop Grumman, Safran, Fokker, Triumph, GE, Bombardier and Meggitt.