Call it the Tijuana two-step: How Chinese goods dodge American tariffs
economist.com
economist.com
Calling out Mexico but ignoring Vietnam is kinda dumb, especially because tariff evasion by labeling Chinese goods as Vietnamese is way more common than the Mexican route because of the China-ASEAN FTA.
Secondly, Mexico has re-instated tariffs reaching 50% on Chinese goods recently, so it's not a scalable route [0][1]
Furthermore, Section 321 only applies to small goods (ie. The kinds of FMCGs you find on Temu or Shien) which were never on the radar for tariffs because there's no point [2], and you can't de minimis your way into building a car or steel.
In addition, I also think this article is ignoring the larger goal of tariffs - indirect costs like co-mingling and building new supply chains to minimize tariffs are expensive, and drastically reduce margins. Subsidizes only go so far, and at some point it's just burning money.
[0] - https://www.whitecase.com/insight-alert/mexico-reinstates-ta...
[1] - https://www.bloomberg.com/news/articles/2024-04-30/mexico-ta...
[2] - https://www.barrons.com/articles/shein-temu-china-tariffs-26...
"Furthermore, Section 321 only applies to small goods (ie. The kinds of FMCGs you find on Temu or Shien) which were never on the radar for tariffs because there's no point [2], and you can't de minimis your way into building a car or steel."
Small goods are worth a lot of money in aggregate. Hope that helps.
Biggest culprit, Amazon.
What??
Tariffs on small goods are not generally the point, and measures like this are actually achieving the goal of tariffs-inserting friction in the supply chain, encouraging alternative opportunities without destroying domestic supply / sales segments.
Measures like this will only be economically viable until automation levels the playing field, and an automation heavy economy is exactly the goal for US local manufacturing. We aren’t interested in setting up thousands of sweatshops so we can compete with fast fashion from China. We’re not trying to become the world’s leading source of counterfeit electronic components or fake fashion goods, and tariffs aren’t meant to be sanctions.
This “one weird trick” exists because it’s irrelevant to the goal of tariffs. The article has “those devilish, tricky Chinese” vibes and misses the relevant points entirely. Disappoint.
Does the Tijuana two-step cost 10%?
Garments have had a 25% import tariff in Mexico since 2023 [0][1], and Trans-Pacific shipping costs have risen 70% [2].
This means, a shirt that costs $1 to manufacture in China and is sold at $1.03 (profit margin) will now cost an additional $0.25, making the overall cost $1.28. Meanwhile, the US has FTAs with Vietnam [3], which means Vietnamese manufacturers can still charge $1.03 (in fact, the margin is higher in VN because input costs are lower). The only way the Chinese manufacturer can compete is to spend $0.25 of their own money, but the Vietnamese manufacturer can undercut the Chinese manufacturer by selling at $1.01 and still end up ahead.
The math gets way worse with steel, automotive, machinery, and other high value goods that get hit with the 50% tariff.
It doesn't matter if a Chinese manufacturer exports directly to the US or via Mexico - they will always be burning money, while competitors in Vietnam, Mexico (they give a tax holiday if you manufacture in MX under IMMEX), India, and Bangladesh can reinvest or discount and undercut Chinese manufacturers. The only reason to eat this loss as an exporter is if you are trying to build funds abroad because you cannot transfer them outside anymore (eg. the parents of a couple of my Chinese friends back in college began doing this because of the money transfer limit Xi instated in 2017-18).
PDD (owner of Temu) and Shein can eat these costs because they are marketplaces (they aren't doing the manufacturing), but the sellers and manufacturers are the ones that are generating a loss.
[0] - https://research.hktdc.com/en/article/MTQ2Mjg4MjA2MA
[1] - https://research.hktdc.com/en/article/MTY4MDcyNjEzOQ
[2] - https://www.logisticsinsider.in/global-maritime-trade-faces-...
[3] - https://www.trade.gov/country-commercial-guides/vietnam-trad...