Required Report - public distribution

**Date:** 08/22/2005

**GAIN Report Number:** MX5074

MX5012

**Mexico**

Agricultural Situation

**Mexico Announces Retaliatory Tariffs in Response to Byrd Amendment**

2005

**Approved by:**

![](media/image1.wmf)Suzanne E. Heinen

#### U.S. Embassy Mexico City

**Prepared by:**

Sal Trejo and Dulce Flores

**Report Highlights:**

On August 17, 2005, Mexico\'s Secretariat of Economy (SE) announced it
will implement Mexico\'s retaliatory actions in response to the WTO
ruling on the Byrd amendment. The products involved are classified in
tariff codes 1704.10.01, 1704.90.99, 1901.90.05, 2204.10.01, 2204.21.01,
2204.21.02, 2204.21.03, 2204.21.04 and 2204.21.99.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Mexico \[MX1\]

\[MX\]

**Introduction:** This report summarizes two official announcements
published in Mexico's "*Diario Oficial*" (Federal Register) on August
17, 2005.

**Disclaimer:** This summary is based on a *cursory* review of the
subject announcement and therefore should not, under any circumstances,
be viewed as a definitive reading of the regulation in question, or of
its implications for U.S. agricultural export trade interests. In the
event of a discrepancy or discrepancies between this summary and the
complete regulation or announcement as published in Spanish, the latter
shall prevail.

**FAS/Mexico's Executive Summary:** The Secretariat of Economy (SE)
announced in the *\"Diario Oficial\"* (Federal Register) the temporary
modification of duty rates in relation to U.S. merchandise classified in
the tariff sections indicated below in response to the WTO ruling on the
Byrd Amendment. According to the decree, the tariffs are effective
August 18, 2005 and will be in force for 12 months, unless the U.S.
modifies the Byrd Amendment in accordance with the WTO decision, in
which case, the tariffs will return to the previous levels.

+--------+-----------------------------------------+------+-----------+
| > **H  | **Description**                         | >    | > **U.S.  |
| .T.S** |                                         | **Im | > Export  |
|        |                                         | port | > Value** |
|        |                                         | >    |           |
|        |                                         | tari |           |
|        |                                         | ff** |           |
+--------+-----------------------------------------+------+-----------+
| > 1704 | Chewing gum, including those covered    | > 9% | > \$15.9  |
| .10.01 | with sugar                              |      | > million |
+--------+-----------------------------------------+------+-----------+
| > 1704 | > Chewing gum, Other,                   | > 9% | > \$23.4  |
| .90.99 |                                         |      | > million |
+--------+-----------------------------------------+------+-----------+
| > 1901 | > Preparations made from milk products  | >    | > \$143.8 |
| .90.05 | > with a milk solids content in excess  |  30% | > million |
|        | > of 50% by weight, except those        |      |           |
|        | > outlined in 1901.90.04                |      |           |
+--------+-----------------------------------------+------+-----------+
| > 2204 | > Sparkling wine                        | >    | > \$1.4   |
| .10.01 |                                         |  20% | > million |
+--------+-----------------------------------------+------+-----------+
| > 2204 | > Strong aged wines, whose alcoholic    | >    | >         |
| .21.01 | > strength exceeds 14º Gay-Lussac at a  |  20% | \$270,000 |
|        | > temperature of 15º C, in clay,        |      |           |
|        | > crockery or glass containers.         |      |           |
+--------+-----------------------------------------+------+-----------+
| > 2204 | > Red, rose or white wine, whose        | >    | > \$4.8   |
| .21.02 | > alcoholic strength does not exceed    |  20% | > million |
|        | > 14º Gay-Lussac at a temperature of    |      |           |
|        | > 15º C, in clay, crockery or glass     |      |           |
|        | > containers.                           |      |           |
+--------+-----------------------------------------+------+-----------+
| > 2204 | > Grape wines, called fine wines,       | >    | > \$4,000 |
| .21.03 | > claret types whose alcoholic strength |  20% |           |
|        | > does not exceed 14º Gay-Lussac at a   |      |           |
|        | > temperature of 15º C. For red and     |      |           |
|        | > white wines, minimum of 11.5º and 12º |      |           |
|        | > respectively. For Rhine type wines, a |      |           |
|        | > minimum of 11º.                       |      |           |
+--------+-----------------------------------------+------+-----------+
| > 2204 | > Champagne: other wines containing     | >    | >         |
| .21.04 | > carbonic gas                          |  20% |  \$25,000 |
+--------+-----------------------------------------+------+-----------+
| > 2204 | > Other                                 | >    | >         |
| .21.99 |                                         |  20% | \$260,000 |
+--------+-----------------------------------------+------+-----------+
| > 2204 | Other                                   | >    | > \$1.4   |
| .29.99 |                                         |  20% | > million |
+--------+-----------------------------------------+------+-----------+

**FAS/Mexico Analysis:**

In discussion with various industries representatives, the tariffs are
expected to have a varying degree of impact on the affected products.

**Dairy Blends:**

The retaliation of a 30 percent tariff imposed on dairy blends under
tariff code 1901.90.05 will be imposed on the first 29,400 mt imported
into Mexico, with the tariffs reverting to the 2003 published levels (0
percent under NAFTA) after that amount has been imported, although it is
uncertain that imports subject to the 30 percent tariff will reach the
29,400 mt level due to the increased cost. Mexico's dairy products
industry informs us that there are limited substitutes for this product
because of the milk powder content. Other similar products do not
contain the required milk solids required by the industry in their
processes. The only substitute would be non-fat dry milk or whole milk
powder. It is possible that if the retaliatory measures continue with
the application of 30 percent on dairy blend preparations, the industry
could resort to using milk powders, which will enter Mexico in 2006 at
23.5 percent duty and 11 percent duty in 2007 under NAFTA.

Mexico's National Chamber of Dairy Products Industry (CANILEC) is in
total disagreement with the Secretariat of Economia's (SE) establishment
of a tariff the for the following reasons:

1\. CANILEC finds no distortions in the domestic market for fresh fluid
milk that would motivate the GOM to impose a duty on this important raw
material for the dairy industry, in which domestic production only
accounts for 70 percent of demand.

2\. CANILEC has demonstrated that the current level of imports of dairy
based preparations only complements national production and has
demonstrated that there are no year-end inventories of this product that
would cause concern to the domestic industry.

3\. CANILEC feels that this measure will affect the Mexican industry and
consumers more than it will the U.S. since the elevated cost of the
product will be bourne in its entirety by the Mexican industry and
consumers.

# Wines

SE also decided to impose a 20 percent import tax on U.S. wines under
tariff code 2204 as retaliation to the U.S. Byrd Amendment. According to
the Wine Institute representative in Mexico, as well as some importers,
wine sales are expected to drop at least 35 percent; however, wine will
still continue to be imported. U.S. wine has faced no import tariffs
since 2003, enabling it to compete with other countries like Chile. U.S.
wine imports were expected to grow over the long term, in part by the
full implementation of NAFTA, but also the growing awareness of wine and
wine culture in Mexico. (For additional information on the Mexican wine
situation see report MX 4320)

All alcoholic beverages sold in Mexico are subject to two different
taxes: 1) a 15 percent value added tax, and 2) a Special Tax on Products
and Services (Impuesto Especial de Productos y Servicios-IEPS) which is
levied according to the alcohol content of the product.

IEPS TAX LEVELS ON ALCOHOLIC BEVERAGES

(Alcoholic Beverage and Percentage of Tax Level)

  ----------------------------------------- -----------------------------
  ALCOHOLIC BEVERAGES                       IEPS TAX PERCENT

  With alcohol content of up to 13.5        25
  percent                                   

  With alcohol content from 13.5-20 percent 30

  With alcohol content above 20 percent     50
  ----------------------------------------- -----------------------------

Source: Secretaria de Hacienda y Credito Público (Ministry of the
Treasury)

Therefore a \$100 peso bottle of wine would pay 20 percent tax, plus 25
percent IEPS tax, plus 15 percent VAT resulting in a price of \$172.50
pesos, whereas before the import tax, the price was \$143.75 pesos.

The additional 20 percent increase in prices the tariff is expected to
create will put the U.S. at a distinct disadvantage with its
competitors. Most Mexican consumers of wine make their purchasing
decisions based first on price. In addition to facing stiff price
competition from European and Chilean wines, U.S. wines are competing
against the quality image and long-standing tradition of European wines
in Mexico. Those consumers who are not familiar with the high quality of
U.S. wines will choose a national brand, or a Spanish, French, or
Chilean wine, due to the perceived quality and, now, the increased price
disparity.

However, U.S. wine that has been promoted in well-known resort areas
like Los Cabos, Puerto Vallarta, and Cancun, where restaurants are used
to having a reasonable range of good quality wine, could still continue
importing a large volume of U.S. wine. In fact, the Wine Institute will
continue to have wine promotions in resorts, as well as combine efforts
with other U.S. products in seminars and food shows that include wine
tasting.

**Chewing gum:**

The Coordinating Council for Food and Beverages within the National
Chamber of the Transformation Industry (CANACINTRA) expects that there
may be a slight increase in price for imported chewing gum that would
affect consumers, as current prices may have to be slightly adjusted due
to the 9 percent duties now levied on products under tariff codes
1704.10.01 and 1704.90.99. However, the new duties applied to chewing
gum will most likely cause only a slight drop in imports, as only a few
more price sensitive consumers may turn to other types of candies, such
as breath mints, if prices increase.

**Important Dates**

**1. Publication Date:** August 17, 2005

**2. Implementation Date:** August 18, 2005

**3. Validity Period:** For twelve months after date of publication.

**For More Information:**

*Fax:* 011-52-5080-2130

*Email:* AgMexico@usda.gov

**Internet Connections**

*FAS Mexico Web Site:* We are available at http://www.fas-la.com or
visit headquarter\'s home page at http://www.fas.usda.gov for a complete
selection of FAS\' worldwide agricultural reporting.

*Useful Mexican Web Sites:* Mexico\'s equivalent of the Department of
Agriculture (SAGARPA) can be found at www.sagar.gob.mx and Mexico\'s
equivalent of the Department of Commerce (SE) can be found at
www.sde.gob.mx These Web sites are mentioned for the readers\'
convenience but USDA does NOT in any way endorse, guarantee the accuracy
of, or necessarily concur with the information contained on the
mentioned sites.