MEXICALI, Mexico, Aug 2 (Reuters) - For Allied Tool & Die Company, Donald Trump’s threats to tear up trade deals and impose steep tariffs if he becomes the next U.S. president means considering doubling down on Mexico as a base to manufacture for foreign markets.
The Phoenix-based aerospace supplier, and a small but rising number of U.S. companies with plants in Mexican industrial hubs like the border city of Mexicali, say they may have to increase their capacity in the country’s lower cost base to sell goods abroad if the Republican nominee wins the White House.
“What would I do if a giant wall of tariffs were erected in front of me?” said Allied Tool Chief Executive Officer Bill Jordan. “Rather than having the parts travel through the United States to somewhere else, I would create a Mexican company to sell directly to other international companies. We just wouldn’t go through the United States,” he said of his non-U.S. clients.
So far, Trump’s campaign pledges - such as threatening to roll out punitive tariffs, ditch the 1994 North American Free Trade Agreement (NAFTA) and wall off Mexico from the United States - have flummoxed constituents ranging from traders on Wall Street to economists and politicians.
While his rival Hillary Clinton has said she may want to rework elements of trade deals as president, she has not called for tariffs.
The initial strategic planning by Allied Tool and others with operations in Mexico is one of the first signs of how business are preparing for the possibility of a President Trump.
Driven by a desire to simplify supply chains ahead of what would be an era of uncertainty in cross-border commerce, expansion in Mexico would also move in lock-step with recent capital flows across the Pacific drawn by Mexico’s rising cost advantage over China.
“The trend of considering Mexico as a place to build export platforms to countries other than the United States has accelerated,” said Emilio Cadena, CEO of Grupo Prodensa, a firm that specializes in helping foreign companies move to Mexico.
Dozens of U.S. firms involved in making cars, electronics, appliances and other sectors are contemplating such a move, many exporting to elsewhere in the Americas, Cadena added, though he declined to name them lest they face criticism on the campaign trail.
Few Mexican cities have lured more U.S. capital than Mexicali, a onetime agricultural outpost built up by Chinese immigrants a century ago, whose sleepy, run-down old town now forms the center of a giant web of buzzing, state-of-the-art industrial plants that stretch into the surrounding desert.
Across the city, multinationals manufacture everything from Coca-Cola drinks to Apple smartphone chips and sections of Boeing’s latest jet airliners. Over the past year, half the U.S. firms that dominate Mexicali’s assembly plants have been expanding capacity, said Francisco Fiorentini, executive vice president of industrial park developer PIMSA.
Meanwhile, inquiries by multinationals about Mexico as a business location jumped about 20 percent in the year through June, according to Solomon Abudarham, leader of LATAM Global Data Quality at business information provider Dun & Bradstreet.
Mexico’s proximity to the United States has been a win-win situation for both countries, said Allied Tool’s Jordan.
Since expanding into Mexicali six years ago, Allied Tool has created 13 jobs in Mexico, and even more in Phoenix, lifting its total there by 25 percent. It now employs 105 people. “It freed up time so we could do other stuff in Phoenix,” he said.
One big reason is the cost of labor.
According to a study carried out by PIMSA, one U.S. industrial company operating in Mexicali’s home state of Baja California logged a total annual labor cost for an assembly line worker of $7,000. For California, its cost was $42,000.
Still, wary of a Trump presidency and mindful of their exposure to the U.S. market, some American firms are postponing investments until the election is over, said Juan Manuel Hernandez, CEO of Loginam, a Tijuana-based logistics company.
Hernandez estimated about 10 to 15 percent of output from U.S. exporters in Mexico go to non-U.S. markets. Nearly 80 percent of Mexican exports head to the United States. Some components can cross the border several times before products are completed.
Others are taking Trump, his hopes of victory and his protectionist threats, with a pinch of salt.
“We’re used to political demagoguery - but at some point there has to be the specificity of policy,” says Ronald DeFeo, CEO of Kennametal Inc, an industrial toolmaker in Pittsburgh with sales of $2.6 billion and customers in over 60 countries.
Until then, “we’ll continue to operate the way we always operate,” DeFeo added, saying a shake-up of the kind Trump proposes could not be rolled out quickly.
None of over two dozen executives and policymakers consulted by Reuters in Mexico believe that if Trump does win, Congress will want to enact measures that may hit the U.S. economy hard.
“I don’t think it will happen,” said Luis Aguirre, vice president for logistics and government relations in Mexico of U.S. electronics maker Sanmina Corp. “If it did, I think there would be more U.S. capital in Mexico to cope with this possible countervailing duty. He’ll hurt investment in his own country.”
If Trump did succeed in imposing such measures, it was “obvious” that Sanmina would look at increasing capacity in Mexico to diversify products for other markets, he noted.
Proposing tariffs of up to 35 percent on Mexican and 45 percent on Chinese goods, Trump has sought to brand U.S. firms investing in Mexico as unpatriotic, lashing out at the likes of Ford Motor Co, General Motors Co and United Technologies Corp’s Carrier, a maker of air conditioners which in February said it would move hundreds of U.S. jobs there.
That has simply made some firms keep quiet about Mexico.
“American firms are investing without making announcements because they’re waiting for the results in November,” said Guillermo Romero, economy minister of the state of Guanajuato, which in the past few weeks revealed investments by France’s Michelin and Germany’s ThyssenKrupp.
Whether a Trump tariff would take U.S. content in Mexican goods - often as high as 40 percent - into account, is unclear.
However, concern that business costs are likely to rise in the United States whoever wins in November’s elections is pushing U.S. firms to accelerate shortening supply lines away from Asia towards Mexico, said Cesar Ponce, chief executive of WDF Services, a Mexicali aerospace supplier.
“All the big companies present in Mexico are following the trend of moving suppliers here,” said Ponce. “I think Donald Trump is going to strengthen us, not kill us.” (Additional reporting by Timothy Aeppel; Editing by Christian Plumb and Edward Tobin)