Mexican Exports: Russia Replacing US Domination?

Mexican Exports: Russia Replacing US Domination?
Mexico, the top importer of US wheat, is seeking alternative suppliers to reduce their dependence on the US as trade relations between the two neighbours deteriorate. US wheat exports to all countries..

Background 

The relationship between Mexico and the United States has been under scanner for several years. The two countries share a maritime and land border. Many agreements have been signed between them such as the Gadsden Purchase and the North American Free Trade Agreement (NAFTA). Both countries are members of various international organizations, including the Organization of American States (OAS) and the United Nations. The two nations engage in annual trade amounting to approximately $600 billion. 

However, ties between Mexico and the US have soured significantly since US President Donald Trump took office. He had promised to build a wall between the US and Mexico to curtail illegal immigration and announced that Mexico would have to pay for this wall. 

Trump has been critical of a number of multilateral trade platforms, including the Trans-Pacific Partnership and NAFTA, while campaigning. NAFTA, which came into force in 1994, is an agreement signed by Canada, Mexico, and the US. This trilateral trade bloc eliminated nearly all tariffs on Mexico’s exports to the US and vice versa, although most US-Canada trade was already duty-free before the agreement was signed. Ties have deteriorated further since Trump raised the possibility of withdrawing from the NAFTA. 

In March, when President Trump announced global import tariffs of 25% on steel, experts began to raise alarms of an impending trade war. President Trump’s criticism of “unfair trade practices” has extended to US allies. The US recently announced that it would be enforcing metal tariffs against Canada, Mexico, and the EU. Mexico has retaliated to the tariffs by placing import duties on a number of American products including cheese, bourbon, steel products, and pork. 

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Analysis 

Producers of Mexican bread, pasta and flour tortillas are looking for cheaper supplies of wheat from Russia in an attempt to reduce reliance on the US. Russia has surpassed the US as the top global wheat supplier in 2016. Share of the Black Sea grain, including Russia, Ukraine and Uzbekistan, of the international wheat market climbed to about 37% in 2017, according to the International Grains Council, comfortably topping the United States and Canada combined. 

"It's important to send signals to Mr. Trump," said Jose Luis Fuente, head of Canimolt, a Mexican trade group which represents 80% of Mexican millers. He added that Mexico will keep buying American wheat because of its proximity, but "we can't continue to have this absolute dependence.” 

US market share of wheat decline is accelerating as Mexico looks for more alternative suppliers in South America, like Argentina, to hedge against the risk that US grains will get more expensive. Mexican buyers plan to import as much as 100,000 tonnes from Argentina, worth about $20 million based on current prices. They also finalized pest-and-pathogen import clearances to allow shipments of wheat from Argentina, which until now had been forbidden. 

 

US wheat exports to Mexico dropped 38% in value, to $285 million, in the first five months of 2018.
 Since 1994, NAFTA has granted American wheat domination over Mexican imports, however, Trump’s withdrawal has allowed for new entrants to the market which might set the foundation for closer ties in other areas of trade such as arms. 

Within days of Mexico cancelling a $1.4 billion order for eight US made Sikorsky MH-60R Seahawk helicopters, Moscow swooped in for the sale. Russia’s naval workhorse, the Ka-27, has comparable capabilities and is likely to be cheaper, according to reports. However, Inigo Guevara, former director of Mexico’s National Security Council and current director of Jane’s Defense and Security in Washington, said, “Lopez Obrador and his transition team are new to the helicopter issue and lack the defense expertise to assess it.” 

Mexico’s newly elected President López Obrador has written a 7 page letter to President Trump, seeking to initiate "a new stage in the relationship" of the two countries and to make progress in the areas of "trade, migration, development and security.” Mexico has also been advancing the revamp of the North American Free Trade Agreement (NAFTA) and a swift conclusion to negotiations. 

Despite Mexico looking for new suppliers of corn and grain, and US farmers suffering from losses, US has remained steadfast about their commitment to the tariffs. The Trump administration will now pay $12 billion to help US farmers through the Commodity Credit Corporation Charter Act, a Great Depression-era programme, as the escalating trade war cripples the US agricultural sector. 

Assessment 

Our assessment is that the strategy of Mexico to seek alternate sources is aimed at de-risking it from vagaries in the global supply of their staple food. We believe that shortages of food trigger nationwide disturbances which countries can ill afford. We feel that this is a short term tactical move by Mexico and they will eventually find sources closer to home.

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