In response to the U.S. implementation of Section 232 tariffs on steel and aluminum, Mexico has imposed new duties on imports of U.S. pork. On June 5, tariffs on chilled and frozen pork cuts were increased from zero to 10 percent. Effective July 5, 2018, the rate will increase to 20 percent. Mexico also applied a 15 percent duty to pork-only sausages and a 20 percent duty to some cooked ham and shoulder products.
The following is a brief summary of USMEF’s preliminary analysis of the potential impact of these retaliatory duties. USMEF’s full impact report is also available online.
By increasing the tariff on U.S. chilled/frozen pork cuts to 20 percent, Mexico has effectively eliminated the NAFTA benefit, and the tariff on U.S. pork cuts is now at most favored nation (MFN) levels. The new tariffs are not expected to be lifted until the U.S. rescinds the steel and aluminum tariffs.
To minimize the impact on pork prices and encourage imports from non-U.S. suppliers, Mexico has established a duty-free tariff rate quota (TRQ) for 350,000 metric tons (mt) of chilled/frozen pork that will be open through the end of 2018. Import licenses are distributed on a first-come, first-served basis, with 97 percent of the volume allocated to companies that imported these products last year.
WTO rules require new market access to be open to all eligible suppliers, so Mexico does not explicitly exclude U.S. product from the quota. However, it is understood that all chilled/frozen pork cuts imported from the U.S. will be charged the 10 percent (and later 20 percent) duty. There has been great uncertainty about how the quota is being administered but USMEF has been in constant contact with the trade and it is our understanding that companies have not been successful in applying for import licenses for U.S. pork.
In recent years the U.S. has accounted for 90 percent of Mexico’s chilled/frozen pork imports and Canada the other 10 percent. Last year Mexico’s imports of U.S. pork items subject to the new duties totaled 713,500 metric tons valued at $1.25 billion. These chilled/frozen pork cuts accounted for 80 percent of Mexico’s imports from the United States (see chart).
Imposition of new duties on U.S. pork and implementation of the new pork TRQ will likely result in 1) lower volumes of U.S. pork exports; 2) lower U.S. prices (especially hams where Mexico purchases roughly 45 percent of total U.S. production and accounts for 86 percent of U.S. bone-in ham exports); 3) with new competitors entering Mexico’s chilled/frozen pork import market, U.S. share will be lower; 4) substitution of more imported turkey for pork in Mexico’s processing industry; and 5) more features of poultry by Mexican retailers.
Canadian pork is likely to benefit in the short-term from the new Mexican retaliatory tariffs on U.S. pork, although Canada already exports the majority of its hams to Mexico so its ability to ramp up sales – at least in the short-term – may be constrained. Currently about 60 EU slaughter plants are approved to export to Mexico, with more pending approval. The U.S. maintains transportation and logistical cost advantages, so it will not be easy for Mexican processors to switch to frozen European pork. However, increased Canadian and European supplies could result in U.S. market share dropping from the current 90 percent to 75 percent in the second half of this year. This would result in a decrease in U.S. exports of roughly 10,000 mt per month or more than 60,000 mt for the rest of 2018. If unit values hold at first-quarter levels, the drop in export value to Mexico would be more than $100 million over 6 months.
Given the growth in U.S. production and already large U.S. consumption, it is likely that product not going to Mexico will be absorbed in other export markets as well as in the domestic market, at lower prices. The drop in the ham primal value could translate into industry losses of more than $300 million for the remainder of this year and roughly $600 million over the next 12 months. The added negative price pressure for both hams and picnics could result in industry losses of $425 million for July-December 2018 and $835 million over the next 12 months.
USMEF’s understanding is that the duty-free quota is specifically aimed at Mexico’s processing industry and retailers are not able to purchase pork at zero duty (beyond Canadian and Chilean pork, where the potential for supply growth is limited). Prices for Mexican pork already see inflationary pressure, so retailers are likely to shift more shelf space to poultry as they struggle to offset the cost of the 20 percent duty on U.S. pork.