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June 6, 2019 4:30 PM, EDT

Cost of Diesel Likely to Go Up Once Tariffs Begin to Hit Mexico

Trucks heading into MexicoTrucks wait to cross the U.S. border in Ciudad Juarez, Mexico, on April 9. (Associated Press/Christian Torres)

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President Donald Trump’s threat to impose a 5% tariff on Mexican products June 10 unless he is satisfied the Mexican government has done enough to slow the surge of immigrants into the United States is likely to raise the price of diesel.

Mexico accounts for about 9% of U.S. oil imports, according to the U.S. Energy Information Administration, and its heavier grade of crude gets refined in the Gulf Coast region into trucking’s main fuel.

JUNE 7 UPDATE: Trump drops Mexico tariff plan following deal on migrants.

“If the price of crude goes up, so goes the price of what we are purchasing, whether it be diesel fuel or gasoline,” said Glenn Kedzie, energy and environmental affairs counsel for American Trucking Associations. “These refineries look internationally for this global product for a reason. If there was enough product available for what they needed at the price they needed domestically, they would migrate towards that, but there’s isn’t. It’s Economics 101.”

Glenn Kedzie, energy and environmental affairs counsel for American Trucking Associations

 

Kedzie

At 665,000 barrels of oil per day, Mexico is the third-largest oil importer to the United States behind Canada and Saudi Arabia, respectively.

Each day, hundreds of trucks cross the U.S.-Mexico border carrying everything from auto parts to vegetables.

“Tariffs are a dreadful idea. This will throw Mexico’s economy into a recession,” Peterson Institute Economist Gary Hufbauer said. “Mexico is going to retaliate.”

Trump said the proposed tariff will increase by 5% each month until reaching as much as 25% later in the fall. Talks aimed at preventing the tariffs started June 5 with no resolution at press time.

According to the U.S. Trade Representative, total 2018 trade between the United States and Mexico was $671 billion in imports and exports. Hufbauer said the initial 5% tariff will cut trade between the nations by about $70 billion.

Experts warn fruits and vegetables imported from Mexico will be especially hard hit.

Trucks crossing border

Trucks line up at the Corboba-Las Americas international bridge to cross with their cargo from Mexico into the United States, in Ciudad Juarez, Mexico, on May 31. (Associated Press/Christian Torres)

According to the U.S. Department of Commerce, 78% of Mexico’s agriculture exports come to the United States — its third-largest agriculture partner — including corn, soybeans and wheat.

“The consumer will have to pay a little more, especially at the grocery store,” Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University in Atlanta said.

Trade organizations that represent trucking raised alarms that the tariffs could also harm supplier industries and make trucks parts more expensive.

“Keeping our borders open for business for free and fair trade is important to our nation’s economy and is vital for the more than 47,000 Americans who work in trucking-related jobs supported by cross-border freight movements between the U.S. and Canada and Mexico,” ATA said.

Equipment manufacturers, including Paccar International, Daimler Trucks North America, Navistar International and Bendix build trucks and parts in Mexico.

“Paccar operates truck factories in both the U.S. and Mexico,” said Ken Hastings, an investor relations representative with Paccar, maker of the Kenworth and Peterbilt truck brands. “Our strategy is to produce trucks in the markets in which they are sold. Therefore, the vast majority of trucks produced in Mexico have been for Mexico. Paccar supports free and fair trade and the USMCA.”

USMCA is the newly negotiated trade agreement between the United States, Mexico and Canada. It has yet to be ratified by the three nations.

In November, DTNA announced plans to build its new Freightliner Cascadia truck in Mexico.

“By our figures, there’s about $457 million worth of auto parts that cross the border every day,” said Motor and Equipment Manufacturers Association Senior Vice President Ann Wilson.

Wilson added it’s not uncommon for car and truck parts to cross the border more than once as a vehicle is being assembled, and each time the parts enter that country, they’ll be slapped with a tariff.

“We are a just-in-time delivery industry. Tariffs complicate this and add expense. There is a tipping point to how much companies can absorb,” Wilson said. “If you continue to increase the cost of doing business, they will start to shed jobs. Or they will close.”