Trade tariff wars: what does it mean for dairy?–Part 1

Published 11 July 18

Developments in trade tensions between the US and other superpowers has been well documented over the last few months. In this article, we look at the rising tensions between the US and Mexico which has recently unfolded, and what the potential knock on effects are for the respective dairy industries.

On 1 June, the US announced that Canada, Mexico and the EU would no longer be exempt from a 25% tariff on steel and a 10% tariff on aluminium. In response, Mexico announced it would introduce retaliatory tariffs (10-15%) with immediate effect on a wide assortment US origin products, ranging from potatoes and bourbon to pork, which increased further (20-25%) on 5 July. A range of cheese products were included on the list (see table below), which encompasses nearly all US cheese exports into Mexico.

 

Immediate (5 June)

5 July

Fresh Cheese

15%

25%

Cheese of any kind, grated or in powder

10%

  

20%

Grana or Parmegiano-reggiano, Gouda, Habarti, Fontina ect.

10%

20%

Other

15%

25%

             Source: Mexican Official Journal of the Federation

Mexico is the largest export destination for the US for cheese. In 2017, the US exported 97,000 tonnes ($392 million US dollars), which accounted for 28% of all cheese exports. Meanwhile, Mexico is very dependent on US cheese, making up 75% of total imports. Therefore, the introduction of tariffs has the potential to cause a major ripple effect through the industry. The cheese products hit by additional tariffs accounts for 94% of total US cheese exports into Mexico. 

Volume of Mexican imports of US cheese products (2017)

The full impacts of the tariffs is still unknown. However, according to Rabobank, Mexico has an estimated 6-month supply of cheese stocks, so the full effects of the tariff introductions will become clear if the tariffs remain in place beyond when this stock is depleted. Nevertheless, the introduction of the tariffs will introduce renewed pressure into the Mexican cheese industry to increase supply, which could limit competition in the short term.

In recent years, Mexico has been diversifying its supply base. Trade relations between the EU and Mexico have been strengthening, with a renewed trade agreement ‘agreed in principle’ but not yet implemented, there is scope to fast track this in order to meet the Mexican demand. The agreement would involve Mexico scrapping up to 45% of import tariffs on European cheese.

For the US in the short-term, the tariffs presents price challenges in order to remain competitive on international markets while uncertainty around available exports destinations builds. Cheese manufactures may stock inventories if market prices are negatively affected. In the longer term, the trade tensions between the US and its trading partners may negatively affect the US reputation as a trade partner.

Look out next week for part 2, where we will look more closely at the latest release of retaliatory tariffs from China, which now includes a range of dairy products and how this could affect dairy markets.