MEXICO'S PANTRY STRUGGLES UNDER NEW TARIFFS; US PRODUCE

UNCLAS GUADALAJARA 000144 SIPDIS E.O. 12958: N/A TAGS: EAGR ETRD ECON PREL MX SUBJECT: MEXICO'S PANTRY STRUGGLES UNDER NEW TARIFFS; US PRODUCE EXPORTS AT RISK REF: A) GUADALAJARA 131, B) MEXICO 808 ¶1. Summary: In Jalisco, the impact of the new Mexican tariffs set on 90 products imported from the US has been more than symbolic. The region is a significant consumer of US food exports, some of which have now been imperiled by the new duties. Jalisco companies specializing in US produce are beginning to modify their practices to adjust to the change in prices. If the tariff issue is not swiftly resolved, it could lead to a permanent shift to suppliers in other countries, or a discontinuance of the sale of some products in the local market, thereby hurting US export income and employment. End summary. -------------- KICKING A DOWN MARKET: -------------- ¶2. With produce sales already down by 40 percent due to a recessionary economy and unfavorable exchange rate, the new tariffs could hardly have come at a worse time for the vendors of imported agricultural products. While the business community understands the reasons for the Mexican government's actions in retaliation for the US ban on the entry of Mexican trucks, there is no denying the local impact. Some major vendors told us that sales of targeted US agricultural goods could fall by another 20 percent or more, and they are beginning to modify their practices to adjust to the change in prices. ¶3. A meeting between the US Commercial Services and UCMA (Union de Comerciantes del Mercado de Abastos) the trade association representing the grocers at the largest central food market in the state, revealed that while most of the products on the tariff list can be easily substituted, those vendors specialized in imports of almonds, grapes and other fruits, have been especially hard hit. UCMA representatives were very anxious to see the new tariffs removed. -------------- TRYING TO COPE: -------------- ¶4. While vendors have been encouraged to try to develop local sources for the products they import, this is impractical in the short term and impossible for certain products such as grapes which require different climactic conditions. Buying from suppliers in other countries is possible in some cases, but presents difficulties since clients are accustomed to the US products (one grocer told us he had explored buying table grapes in Chile, but could not find the specific variety his customers desired in that country). ¶5. Almond importers have found a temporary solution to the tariff-induced price hike, which is to import whole almonds instead of processed almonds as they had in the past. The importer then has all of the value adding processing such as slicing, done in Mexico, to cut down on the costs. For other products where processing is unnecessary, such as for specialty grapes, bulk importers have little choice but to pass the price down to their customers, resulting in a sharp drop in demand. -------------- RESTAURANTS SUFFERING TOO: -------------- ¶6. It's not only the grocers that have been hurt by the new tariffs. The US citizen owner of the Outback Restaurant franchise in western Mexico told us that a number of his key ingredients sourced from the US have also been affected, raising his costs and damaging sales in an already soft restaurant market, and raising the risk of layoffs for his 400-person workforce. Both he and some of his US suppliers are writing to their Congressional representatives outlining the negative effects of the tariffs on their businesses and urging a prompt settlement of the trucking dispute. -------------- -------------- COMMENT: US JOBS AND INCOME AT RISK -------------- -------------- ¶7. While the Mexican government carefully targeted the tariffs for maximum impact in the United States, there has been some collateral damage in western Mexico, affecting influential produce importers and some high-profile international investors. The real losers are US exporters. If the tariff issue is not resolved quickly, more and more vendors will seek alternate sources of supply, or discontinue sales of some products altogether because they are no longer profitable. Consumer tastes and shopping patterns could also shift, and companies that have taken on more value-added processing tasks, like the almond sellers, might not return to pre-tariff practices. All of this threatens US jobs and export income. RAMOTOWSKI