Trump’s Tariffs Threaten Trade War with Mexico, but Natural Gas Remains Unaffected for Now

By Christopher Lenton

U.S. President-elect Trump’s social media announcement that he would impose a 25% tariff on all imports from Mexico set off a series of alarm bells in the energy sector across the integrated North American region.

Mexican President Claudia Sheinbaum responded by sending a letter to her U.S. counterpart in which she warned of retaliatory tariffs. “President Trump, migration and drug consumption in the United States cannot be addressed through threats or tariffs. What is needed is cooperation and mutual understanding to tackle these significant challenges.

“For every tariff, there will be a response in kind, until we put at risk our shared enterprises,” Sheinbaum said.

On Wednesday morning during her daily press conference, the Mexican president invited economy minister Marcelo Ebrard to expound on the topic.

Ebrard reminded the audience that previous tariffs in the 1930s and for four months in 1971 caused significant hardship in the United States before they were scrapped.

He said today, “you have to expect the implications would be much higher” with the trading bloc between the United States, Mexico and Canada representing 30% of the world’s economy. Trump also threatened a similar levy on Canada.

U.S. companies such as automakers General Motors Co., Stellantis NV, and Ford Motor Co. have been in Mexico for many decades and would be hit hardest, Ebrard said.

He said by his calculations 88% of pickup trucks in the United States came from Mexico and that their prices would rise by an average of $3,000. The cascading effects would impact 400,000 U.S. jobs, he said.

“We could have a trade war…or we work together to construct a strong region together to compete with other regions,” he said.

The tariffs would also go completely against the spirit of the United States-Mexico-Canada-Agreement (USMCA), the free trade pact that replaced the North American Free Trade Agreement (NAFTA).

Natural Gas Impact

Analysts contacted by NGI felt there would be no immediate impact in the natural gas market. Mexico imports of U.S. gas have averaged 6.54 Bcf/d so far this year, up 240 MMcf/d versus the same period last year, Wood Mackenzie data show. U.S. imports account for 72% of Mexico’s natural gas needs.

“I think this is a ploy to negotiate something,” said Francisco Monaldi, director of the Latin America Energy Program at the Center for Energy Studies at Rice University’s Baker Institute for Public Policy. He called the proposed tariffs “reckless.”

“Some people have said Mexico could retaliate with a 25% import tax on natural gas,” he added, but “I think that’s very unlikely.”

Monaldi told NGI’s Mexico GPI that “it has to do with the elasticity of demand and supply. Mexico has very little flexibility. They don’t have the option of importing from elsewhere so it would only hurt Mexican consumers.”

Could Mexico place tariffs on refined products coming from the United States? “I don’t think that makes sense either. But there is more flexibility on that side than on the natural gas side,” Monaldi said. “My base case scenario is that they will negotiate something before this is imposed and this is more a negotiating tactic by Trump.”

Diego Rivera-Rivota of Columbia University’s Center on Global Energy Policy also questioned whether Trump was simply bluffing for political gain. “It’s not the first time he has said this. He said this in May 2019, but it never materialized. He said it during the last week of the campaign. The new thing is he is including Canada and China. So the question is will this happen or not?” he told NGI’s Mexico GPI.

Mexico is the single largest trade partner of the United States. Ebrard in the Wednesday morning press conference said that the total value of trade between Canada, the United States and Mexico in the first nine months of 2024 had totaled $1.6 trillion.

“But the bulk of exports aren’t related to energy,” said Rivera-Rivota. Tariffs would mean price increases for U.S. consumers of “screens, computers, ACs, fans, refrigerators, freezers, beer, avocados, tomatoes, berries…and that will have a large impact on U.S. consumers.”

Mexico, meanwhile, exports 500,000 b/d of heavy crude that goes to refiners in the U.S. Gulf Coast. “It’s not super easy to substitute. That is 6% of total crude imports in the U.S. and 3% of total refinery intake.”

As for natural gas, “I don’t see any major headwinds,” he said, but, longer term, tariffs could hurt industry and Mexico’s economy, which would lower overall natural gas demand.

Former trader and Mexico consultant Santiago Villareal said that natural gas traders in Mexico were not worried. “Natural gas traders think that it is just rhetoric…in practice it would damage the U.S. economy way more than Mexico and Canada,” he told NGI’s Mexico GPI.

Price Impacts?

So far, the natural gas market has been unperturbed. Early on Wednesday, the January New York Mercantile Exchange contract was down around 15.0 cents to $3.312/MMBtu as of 8:35 a.m. ET.

But could this change down the line? Trump said he would impose an additional 10% tax on goods imported from China, which might lead to retaliation from the Asian giant.

Beyond one operating export terminal and one under construction, there are seven proposed LNG export projects in Mexico with 44.2 million tons/year in combined capacity, according to Poten & Partners data. China, and Asia in general, are potential markets.

EBW Analytics Group’s Eli Rubin, senior analyst, highlighted the “potential for substantial tariffs delivering dramatic shifts in global trade dynamics” that “may pose increasing risks of external threats.”

Gonzalo Monroy, director of Mexico City’s GMEC consultancy, told NGI’s Mexico GPI that “this is going to be a big bluff and a non-issue in terms of energy.

“The Trump administration doesn’t seem to grasp the reliance it has with Canada and Mexico…especially Canada. It could cripple the U.S. economy.”

He said if anything, recent cabinet picks by Trump paint a picture that would indicate more natural gas production, which down the road would only serve to stabilize prices and benefit Mexico.

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Christopher Lenton joined NGI as a Senior Editor for Mexico and Latin America in November 2018. Prior to that, he was a Senior Editorial Manager at BNamericas in Santiago, Chile. Based out of Santiago, he has covered Latin American energy markets since 2009 as a reporter, editor and analyst. He has an MA in International Economic Policy from Columbia University and a BA in International Studies from Trinity College. Energiesnet.com does not necessarily share these views.

Editor’s Note: This article was originally published by Natural Gas Intellince, on November 27, 2024. EnergiesNet.com do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld or EnergiesNet.com

Trump Tariffs Risk Trade War With Mexico, but Natural Gas Flows Seen Safe For Now

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EnergiesNet.com 12 22 2024