Mexico Could Provide Solution for U.S. Exporters in Trump Bind, According to Reuters

By Dave Graham

MEXICALI, Mexico – For Allied Tool & Die Company, the potential of Donald Trump tearing up trade agreements and imposing significant tariffs if he becomes the next U.S. president has led to a reevaluation of its manufacturing strategy in Mexico.

The Phoenix-based aerospace supplier, along with a growing number of U.S. companies with operations in Mexican industrial regions like the border city of Mexicali, is considering increasing production capacity in Mexico to facilitate sales to foreign markets, should the Republican nominee win the presidency.

"What would I do if a giant wall of tariffs were put up in front of me?" asked Allied Tool’s CEO Bill Jordan. He suggested that instead of routing parts through the U.S. to reach other countries, he might establish a Mexican entity to sell directly to international clients, bypassing the U.S. altogether.

Trump’s campaign rhetoric—threatening punitive tariffs and the abandonment of the 1994 North American Free Trade Agreement (NAFTA)—has left many, from Wall Street traders to economists and politicians, scratching their heads.

In contrast, his opponent Hillary Clinton has indicated a desire to amend trade deals as president but has not proposed imposing tariffs.

The initial strategic adjustments by Allied Tool and others operating in Mexico signal how businesses are gearing up for a potential Trump administration.

Faced with the prospect of uncertainty in cross-border trade, many companies are looking to simplify their supply chains, with an expansion in Mexico aligning with recent capital flows attracted by Mexico’s competitive advantages over China.

"The consideration of Mexico as a production platform for other markets is accelerating," noted Emilio Cadena, CEO of Grupo Prodensa, a firm that assists foreign businesses in relocating to Mexico.

Numerous U.S. companies in sectors such as automotive, electronics, and appliances are exploring similar moves, with many targeting markets beyond the U.S., according to Cadena, who refrained from naming specific companies to avoid potential campaign criticism.

Mexicali, which historically thrived on agriculture and was developed by Chinese immigrants a century ago, is now the center of a vast network of advanced industrial plants. The city produces a range of products, from beverages to smartphone components, with many U.S. firms expanding their operations in the area over the past year.

Multinational interest in Mexico as a business location has surged, with inquiries increasing by approximately 20 percent in the year ending in June.

Allied Tool’s Jordan emphasized the mutual benefits of Mexico’s proximity to the U.S. Since its expansion into Mexicali six years ago, the company has boosted its workforce significantly, creating 13 jobs in Mexico and increasing its total staff by 25 percent in Phoenix.

A major factor driving this shift is labor costs. A study indicated that an assembly line worker in Baja California has an annual labor cost of $7,000, compared to $42,000 in California.

Despite the advantageous conditions, some American businesses remain cautious about a potential Trump presidency and, mindful of their U.S. market exposure, are delaying investments until after the election.

Juan Manuel Hernandez, CEO of a Tijuana-based logistics firm, estimated that 10 to 15 percent of output from U.S. exporters in Mexico is directed toward non-U.S. markets, while nearly 80 percent of Mexican exports go to the U.S.

Others, however, take Trump’s chances and protectionist threats with skepticism. Ronald DeFeo, CEO of an industrial tool manufacturer, remarked that while political rhetoric is common, concrete policy details are necessary for action, suggesting that significant changes would not happen overnight.

Among the more than two dozen executives and policymakers consulted, there is a general consensus that if Trump wins, Congress may resist any drastic measures that could negatively impact the U.S. economy.

Assessment of potential Trump-imposed tariffs indicates that companies might consider increasing their Mexican operations to mitigate financial impacts.

Trump’s proposals include imposing tariffs of up to 35 percent on Mexican goods, which he has framed as a critique of U.S. companies operating in Mexico.

The uncertainty surrounding future tariffs has prompted many businesses to maintain a low profile regarding investments in Mexico.

American firms are reportedly investing without publicizing their plans, biding their time until the election results are clearer.

Regardless of the election outcome, the belief that operating costs might rise in the U.S. is pushing many firms to reorient supply chains from Asia to Mexico, as highlighted by the CEO of a Mexicali aerospace supplier.

"All the major companies in Mexico are following the trend of moving suppliers here," he stated. "I think a Trump presidency will strengthen our position rather than harm it."