Trump tariffs are a rude awakening for border cities that bet on trade

Since the North American Free Trade Agreement, or NAFTA, took effect in 1994, the region has grown into a $250 billion economic machine.

“It’s a third country,” Rafael Fernández de Castro, head of the Center for US-Mexican Studies at the University of California at San Diego, said of the binational entity that has arisen, combining cultures and economies.

Mexican officials are cautiously optimistic that the region will survive the onslaught of US tariffs, in part because many products are shielded by the free trade agreement.

But jobs could disappear in both countries if tariffs disrupt a system of co-production that has sent car parts, airplane components and medical equipment zipping back and forth over the border.

The uncertainty of the on-again, off-again tariffs has prompted many companies to pause investments. Confusion reigns over which products will qualify for the free-trade exemption, with the vital car-manufacturing industry widely expected to take a hit. And Trump may not be finished layering tariffs on Mexico. On Thursday, he threatened more, because of what he called the country’s failure to observe an 81-year-old water-sharing treaty.

“We’ve lived 30 years under a nontariff, free-trade environment,” said Ernesto J. Bravo, a senior manager at Tecma, a firm providing logistical, customs and administrative services to export-oriented firms along the border. “All that is now changing dramatically.”

Trump imposed the tariffs in part to shore up US industry and drive more manufacturing jobs to the United States. It could take months for the effects to become clear - and some might not be what the US leader expected.

Kenia Zamarripa, a vice president at the San Diego Regional Chamber of Commerce, worries that the measures could push up the price of steel, lumber and medical instruments - making it harder to build or run hospitals in California.

“Those things we have been promised as reasons to invest in the region are now at risk,” Zamarripa said.

Border residents have survived bouts of economic turbulence. In 2017, after Trump was first inaugurated, he insisted on a renegotiation of NAFTA, calling it “the worst trade deal ever made.” The free-trade accord was largely preserved in its replacement: the US-Mexico-Canada trade agreement, USMCA.

Two years later, Trump warned he’d impose crushing tariffs unless Mexico cracked down on US-bound migrants. It complied, and he dropped the threats. Then came the covid-19 pandemic.

But those were nothing compared with this time.

Normally, Bravo’s firm sends 400 to 800 truckloads of goods across the border each week - everything from furniture to TVs to water-treatment equipment. But recently, the free-trade system screeched to a halt.

Trump had pledged to slap 25 percent tariffs on all goods from Mexico in February unless it reduced the flow of fentanyl and migrants to the United States. Mexican President Claudia Sheinbaum persuaded him to hold off for a month, while she rushed troops to the border. In early March, she won another month-long reprieve - but a few days passed before it kicked in. In the meantime, a 25 percent tariff descended on Mexican exports.

“It was a major impact and a major wake-up call to the industry that, ‘Hey - this is very real,‘” said Bravo. He sent only about a dozen trucks over the border in that period.

Since then, Trump has narrowed the 25 percent tariff. He says it won’t apply to products that qualify for duty-free treatment under the USMCA.

The trouble is that’s only around half of Mexico’s exports.

Even for eligible goods, many companies did not go through the trouble of shipping under USMCA, with its paperwork and requirements for quantities of North American components, opting instead to ship under low- or zero-tariff rules set by the World Trade Organization.

Now, they’re scrambling.

It’s one thing to switch a basic item, like avocados, from one set of rules to the other. But a car might have 10,000 unique parts, each with its own customs code, Bravo said. Manufacturers of electrical, communications and auto goods are being forced to investigate the origin of each part, even those purchased in Mexico. They’re hunting for substitutes in North America for components made in China to be able to export duty-free.

The medical-instruments industry, a major manufacturer in the Tijuana area, is already warning of price hikes for critical items such as pacemakers and insulin pumps.

Despite the new obstacles, some Mexican politicians say the country may benefit from the tariffs - because China is facing even higher ones.

Adriana Eguía is vice president of Vesta, an industrial real estate firm. She’s typical of the bilingual, bicultural managers in the export industry. She grew up on the Mexican side of the border, married an American and lives in San Diego. She works from a stylish penthouse office with a sweeping view of Tijuana.

In February and March, she saw little business, as Trump imposed trade measures that affected Mexico: the tariffs over fentanyl and migration, a 25 percent global tariff on steel and aluminum, and a similar tax on auto imports. (Vehicles from North America will be taxed only on the non-US parts.)

Then came his tariffs on China - which jumped from 54 percent to 104 percent, then 145 percent. “The last three days have been crazy,” Eguía said.

More than a half-dozen clients suddenly appeared at her office, trying to secure industrial properties. Most represented Chinese firms, she said, presumably looking to manufacture under the terms of the free-trade treaty.

Three miles away, in an aging, gritty factory tucked into a modest Tijuana neighborhood, René Romandía is dreaming big. He’s run a variety of manufacturing businesses over the years - making bodyboards, face masks during the pandemic, packaging materials. It’s been a struggle; the Chinese government subsidizes many industries, which export a flood of cheap goods.

“This moment is completely different,” Romandía said. “Because now we can compete on price against China.”

His phone rang. Trump had just hiked tariffs - again.

“Fifty percent more on China! Okay, papi,” Romandía said and put the phone down. He grinned.

“It’s like, when the two giants are fighting and you are just watching them fight,” he said. “We are getting benefits.”

Still, it’s unclear how much Mexico could benefit from the tariffs. One big unknown: whether the Trump administration will subject components to potential tariffs every time they cross the border. That could be ruinous for industries like autos and medical instruments. Mexico is trying to negotiate an exemption for such co-production.

Sheinbaum’s government has said it wants to seize this moment to develop more Mexican-made parts, to supplant imports from China and elsewhere. But the government is burdened by a 6 percent fiscal deficit, the highest in decades, and businesses have said they’re wary of investing after Sheinbaum introduced a judicial reform that many say will politicize the justice system.

Ultimately, many people in the border region say the close US-Mexico trade relationship is likely to endure, since it benefits Americans, too - helping US firms stay competitive globally, and providing consumers with lower prices. This week more than 100 officials and business leaders from San Diego and Tijuana traveled to Washington to lobby - as one region.

“We’re super far away from both capitals, and things are done differently here,” said Eguía. “We have this hybrid culture.”

Ernesto Eslava in Tijuana and Valentina Muñoz Castillo in Mexico City contributed to this report.