Retaliatory tariffs imposed on U.S. pork products by the governments of Mexico and China create significant new obstacles for U.S. exports. But while Mexico and China are both key destinations for U.S. pork, these markets differ significantly in terms of product need, current market conditions and U.S. pork’s position versus competing products.
Effective June 5, Mexico’s import duty rate on all chilled and frozen pork cuts imported from the United States increased from zero to 10%, and the duty rate increased to 20% July 5. Mexico also imposed a 15% duty on pork sausages and a 20% duty on some prepared hams.
In an effort to combat potential pork price increases and diversify its suppliers, Mexico’s Ministry of Economy also opened a 350,000-metric ton duty-free quota for chilled and frozen pork cuts that will be in effect through the end of 2018. The main beneficiaries of the quota are likely to be European suppliers, as Mexico’s pork imports from the European Union are normally subject to a 20% duty. Mexico’s imports from Canada and Chile are already duty-free under the North American Free Trade Agreement and the Chile-Mexico Free Trade Agreement, though imports from these countries could increase now that they hold a tariff rate advantage over U.S. pork.
Mexico is the largest volume destination for U.S. pork, setting new records each of the past six years. In 2017, exports to Mexico exceeded 800,000 mt and were valued at $1.51 billion. Mexico is an especially critical destination for U.S. hams and picnics, both for further processing and for merchandising in the retail and restaurant sectors.
Dan Halstrom, U.S. Meat Export Federation president and CEO, notes that while Mexico’s retaliatory duties and duty-free quota certainly alter the competitive landscape, U.S. pork remains well-positioned for success in Mexico.
“The U.S. industry’s position as Mexico’s primary pork supplier is not just a product of NAFTA and its zero-duty rate,” Halstrom explains. “It’s also due to a well-established supply chain that allows U.S. exporters to ship fresh raw material to Mexico’s processors and distributors. USMEF devotes significant resources toward educating these key customers about the advantages of fresh U.S. pork and how it can make their businesses more profitable and successful. The great relationships that the U.S. industry has established with these customers are more important than ever, now that we face more intense competition.”
The U.S. industry’s promotional and educational efforts have also helped bolster per capita pork consumption in Mexico, which has increased by one-third over the past 10 years and now stands at nearly 40 pounds per year.
“Mexico is an excellent example of how success in the export markets isn’t always about displacing domestic product or other competitors’ products — it’s also about generating new demand and expanding the customer base,” Halstrom says. “Now it’s absolutely essential that the U.S. industry does everything it can to retain these customers.”
The amount of business at risk and potential losses to the U.S. industry are captured in this impact report prepared by USMEF staff. The report notes that if the retaliatory actions taken by Mexico cause U.S. exports to decline by 10,000 mt per month in the second half of 2018, the drop in export value would be more than $100 million. The drop in the ham primal value could translate into industry losses of more than $300 million for the remainder of this year and roughly $600 million over the next 12 months. When adding picnics, the negative price pressure could result in industry losses of $425 million for July-December 2018 and $835 million over the next 12 months.
Mexico imposed these retaliatory duties in response to higher U.S. duties on steel and aluminum imports. China took similar action in April, but its duty rate increase was 25% (on top of the standard 12%) and applies to both pork muscle cuts and variety meat. Effective July 6, China hit U.S. pork with another 25% duty rate increase in response to U.S. tariffs imposed on a range of imports from China due to issues related to forced transfer of American technology and intellectual property. This means U.S. pork is now subject to a 62% import duty in China, as well as a 10% value-added-tax. Most imported pork entering China faces only a 12% duty plus the 10% value-added tax.
U.S. pork exports to the China/Hong Kong region tend to fluctuate depending on China’s domestic hog production, which is trending higher in 2018. Therefore, all pork-exporting countries are competing in a tighter space in China, as evidenced by China’s total first-quarter imports dropping 10% year-over-year to 595,611 mt.
Last year China was the United States’ third-largest pork export market by volume at 309,284 mt and fourth-largest by value ($663 million). Exports of pork and pork variety meat to China averaged 5.62 pounds and $5.47 per head slaughtered, with exported items split about evenly between muscle cuts (mainly hams and picnics) for further processing and variety meat (such as feet, heads, hearts and tongues) for the wholesale markets.
Because the Chinese market is extremely price-competitive, U.S. producers and exporters must lower prices to maintain sales under the higher duty rate. Exports of some lower value items are no longer feasible with additional duties, so products must either be exported to other markets at lower prices or, in many cases, rendered. Estimated losses for pork variety meat and hams and picnics (the key muscle cut exports to China), could mean industry losses of more than $9 per head, or $770 million for May-December 2018. More details are in this preliminary analysis prepared by the USMEF.
“Exports to China actually held up fairly well in April under the first round of retaliatory duties,” Halstrom explains. “But most of that product was already sold prior to the tariff rate increase being announced, and we expect to see a more pronounced impact in the May and June results when that data becomes available. The second half of the year is obviously shaping up to be very difficult, with U.S. pork facing an import duty rate more than five times higher than that of its competitors.”
Halstrom notes that while a very high percentage of U.S. red meat exports is destined for large, mainstay markets such as Mexico, China/Hong Kong, Japan, South Korea and Canada, the current situation further illustrates the importance of market diversification.
“With outstanding support from our industry partners, USMEF invests considerable resources into emerging markets in regions such as Latin America, Southeast Asia, Central Asia and Africa,” he says. “One of the reasons behind this commitment is to develop alternative markets that will help the U.S. industry through trade impasses or downturns in our larger markets. Times like these remind us of why this is so important.”