(Bloomberg) — President Donald Trump’s vow to impose tariffs on all Mexican goods over illegal immigration threatened to increase costs for automakers and other manufacturers and left Mexico’s president calling to resolve the issue “with dialogue.”
U.S. equities slumped as Trump opened a new front in his trade wars, threatening to place escalating tariffs on Mexico and jeopardizing a new North American trade agreement. Mexico is by far the largest source of U.S. auto imports and tariffs on goods from there would increase costs for many major manufacturers.
“These measures aren’t beneficial for Mexicans or Americans,” Mexican President Andres Manuel Lopez Obrador said in a press conference Friday. He has not received a response from Trump to a letter he sent the American president overnight calling for talks.
Trump’s latest move announced on Thursday would put 5% American duties on all Mexican imports on June 10, rising in increments to 25% in October unless Mexico halts “illegal migrants” heading to the U.S.
Trump warned that the levy “would gradually increase until the illegal immigration problem is remedied at which time the tariff will be removed.” In another tweet on Friday, Trump said, “The Tariff is about stopping drugs as well as illegals!”
Peso Plunge
The Mexican peso tumbled more than 3%, while the dollar jumped along with the yen. The S&P 500 Index headed for its fourth straight week of declines. Treasury yields slipped to a fresh 20-month trough.
The move, which has major implications for American automakers and other companies with production south of the border and the U.S. economy as a whole, represents Trump’s latest expansion of his trade wars. It comes just days after he removed steel tariffs on Mexico that had caused retaliation against U.S. farm products.
It also marries two of his signature issues — trade and immigration — as he ramps up his campaign for re-election in 2020.
Opposition to that approach came swiftly from U.S. industry. Jay Timmons, president and CEO of the National Association of Manufacturers, said Friday: “Intertwining difficult trade, tariff and immigration issues creates a Molotov cocktail of policy, and America’s manufacturing workers should not be forced to suffer.”
The value of cars, trucks, buses and special purpose vehicles imported into the U.S. from Mexico totaled about $68 billion last year, according to the U.S. Census Bureau.
Automakers around the globe, from General Motors Co. to Toyota Motor Corp. to Daimler AG, lost billions of dollars in combined market value in a stock sell-off Friday because they rely so heavily on Mexican factories to supply the U.S. market. Constellation Brands Inc., which imports Corona beer from Mexico to the U.S., fell 7% in New York trading. Kansas City Southern, the railroad that counts on cross-border traffic for about 40% of its freight volume, fell 5.2%.
Initial reaction from Mexican officials was measured, with Obrador saying in a letter to Trump posted on Twitter that “I don’t want confrontation.” Lopez Obrador said his foreign minister and other officials would visit Washington to seek agreement.
Jesus Seade, Mexico’s undersecretary of foreign relations for North America, told reporters in Mexico City Thursday at a previously scheduled event that the country won’t retaliate before discussing the matter with the U.S. But the tariff threat, he added, “if turned into reality, would be extremely serious.”
Economists warned the move could hurt both countries. Mexico’s exports to the U.S. account for about four-fifths of total overseas shipments, or about 28% of its gross domestic product, according to Bloomberg chief economist Tom Orlik.
For the U.S. economy, 5% tariffs on $346 billion of Mexican imports means a price tag of about $17 billion, which rises to $87 billion if the taxes increase to 25%. American consumers will feel the impact more than they did with the China tariffs, as price increases for items like food are more directly observable, Orlik said.
Emergency Powers
To impose the potential tariffs, Trump said he’s invoking authorities under the International Emergency Economic Powers Act, a tool that’s used to impose Treasury sanctions. Analysts and lawyers raised questions about the legality of using it in this context.
“This is a misuse of presidential tariff authority and counter to congressional intent,” Republican Senator Chuck Grassley of Iowa said in a statement Thursday. “I support nearly every one of President Trump’s immigration policies, but this is not one of them.”
Trump made curtailing undocumented immigration a centerpiece of his presidency and campaign. He ran in 2016 on promises to build a border wall to keep out migrants and declared a national emergency to tap federal funds for construction, after Congress didn’t provide as much money as the president demanded.
The tariff move came the same day that Trump presented notice to Congress to pass his renegotiated version of the North American Free Trade Agreement, which has allowed tariff-free trade with Mexico and Canada since it came into effect in the 1990s.
The administration said Thursday’s plan to increase tariffs on its southern neighbor was not linked to Trump’s Nafta replacement, the United States-Mexico-Canada Agreement, which the White House is presenting as his No. 1 legislative agenda item.
Acting White House chief of staff Mick Mulvaney said told reporters on Thursday night that the potential tariffs aren’t part of a trade dispute but about the immigration problem. He added that if the White House finds enough cooperation from Mexico over the coming weeks, the tariffs will either not take effect or will be lifted swiftly.
Acting Homeland Security Secretary Kevin McAleenan laid out what he called “key opportunities for enhanced partnership with Mexico” that could spare the country from increased duties. McAleenan listed the need for Mexico to step up its security efforts at its border with Guatemala, a crackdown on transnational criminal organizations and more cooperation and alignment on asylum policy.
If the U.S. imposes the tariffs, it will be violating Nafta as well as World Trade Organization commitments, said Kenneth Smith Ramos, who was Mexico’s chief negotiator for the USMCA when it was negotiated with the U.S. and Canada last year.
What Bloomberg’s Economists Say…
“The read across from Mexico to China will add to concerns that talks between Washington D.C. and Beijing are going nowhere. Mexico negotiated revisions to Nafta, only to be hit with sweeping higher tariffs. Other countries, including China, will be taking note, perhaps concluding that negotiated agreements with the U.S. are of little worth.”– Chang Shu, Yuki Masujima, Tom OrlikClick here for more insight.
With the move to impose tariffs Trump is reaching for one of his favorite policy tools to pursue a broader policy goal. But he also faces risks of a backlash with polls showing the import taxes he has imposed on goods from China and elsewhere are not popular.
“This is a dramatic escalation that will likely make it impossible for Mexico to continue cooperating with this administration on trade or on controlling asylum flows from Central America,” said Edward Alden, a senior fellow at the Council on Foreign Relations. “Mexico has negotiated in good faith throughout on the USMCA, and has tried to work with the administration on migration. Unless this tariff is quickly reversed, it will kill cooperation on both.”
(Adds industry reaction, Trump tweet in paragraphs 5-9.)
–With assistance from Nacha Cattan, Justin Blum, Ruth Carson, Eric Martin, Michelle Jamrisko and Crayton Harrison.
To contact the reporters on this story: Jenny Leonard in Washington at [email protected];Shawn Donnan in Washington at [email protected]
To contact the editors responsible for this story: Margaret Collins at [email protected], ;Michael Shepard at [email protected], Elizabeth Wasserman, Sarah McGregor
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