June market report: Discussing the real impact of Mexican tariffs on U.S. cheese

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When Mexico announced its retaliation to U.S. tariffs on steel and aluminum imports in early June, those affected by new tariffs predictably flipped out.

Cheese made in the U.S. was among the $3 billion worth of products listed in the Mexican action. This headline from a dairy publication sums up how the dairy industry on our side of the border reacted.

But is the industry’s frantic reaction warranted?

A dose of perspective

Here’s how the tariffs break down by cheese type:

• Fresh cheeses are immediately subject to a 15% tariff; the rate will jump to 25% after July 5.
• Grated, shredded and powdered cheeses are immediately subject to a 10% tariff that will increase to 20% after July 5.
• Grana, Parmegiano-reggiano, Gouda, Havarti and Fontina cheeses are immediately subject to a 10% tariff that will increase to 20% after July 5.
• All other cheese types are immediately subject to a 15% tariff that will jump to 25% after July 5.

In an article published June 7, the U.S. Dairy Export Council’s vice president of trade policy called the Mexican tariffs “a significant setback for our farmers, processors and our exporters.” Tom Vilsack, the Council’s CEO, stated, “Tariffs on cheese will potentially eliminate the competitive advantage we have in our number one market.”

We think it’s true there will be an impact, and we acknowledge the importance of maintaining friendly relations with a country that buys almost $400 million of cheese from the U.S. each year. But new tariffs on American cheese products merely bring us up to par with the 20% to 25% tariffs Mexico has levied on cheeses from non-NAFTA trading partners in the European Union for years.

We don’t think American sellers will lose business to anyone in Europe any time soon, especially when our tariffs are equal, our prices are still lower and our countries are not separated by 5,000 miles of ocean.

We feel that any short-term panic will soon be tempered by the reality that, outside of some isolated disruption and muted movements in price, the sky isn’t falling on the U.S. dairy industry. Global dairy trading will remain alive and well.

The beauty of the global market

Even if Mexican buyers do choose to buy more of their cheese from other sources —Europe being the most likely— we don’t think the impact will be nearly as dire as some in the industry say. For the moment, milk production in Europe has tapered somewhat. If Europeans sell into Mexico, it likely means they choose not to sell somewhere else.

Demand for cheese in Africa, the Middle East and other regions typically served by the E.U. won’t disappear, so someone needs to step in. In the short term, this global dairy Whack-a-Mole still results in U.S. exports of cheese.

But in the long term, we see an opportunity to further bolster American dairy activity abroad. If the E.U. creates the kind of vacuum described above, it gives American sellers the chance to strengthen their relationships with players in markets they’ve had their eyes on for a while.

Meanwhile, the spat between the U.S. and Mexico won’t last forever. We think the dust will settle and a more advantageous trade relationship will return.

Breathless claims that these tariffs will “devastate” American dairy exports are an overreaction. Not that we blame anyone for panicking in public. If the industry collectively paints a bleak enough picture about what could go wrong, North American trade negotiators may actually get serious about fixing NAFTA.

As we noted late last year, we don’t want the pact to disappear, but we do think it needs tweaking. Our biggest sticking point is the agreement’s lack of a mechanism to address complaints—something Canada has exploited to great effect. The subsidies it pays producers under its new Class 7 classification is clearly illegal under both NAFTA and WTO rules. But without a system of redress, our complaints may as well be pointless.

The pact needs fixing, and now’s as good a time as any.