Trump tariffs on Mexico threaten to undercut US economy: analysts

Heather SCOTT
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US President Donald Trump said tariffs on Mexico were about immigration, but then tweeted that it would help restore the US auto industry

US President Donald Trump said tariffs on Mexico were about immigration, but then tweeted that it would help restore the US auto industry (AFP Photo/Brendan Smialowski)

Washington (AFP) - President Donald Trump has trumpeted the robust US economy, but hitting all products from Mexico with 25 percent tariffs threatens to undercut growth and undermine key American industries, economists warn.

Trump announced the tariffs on Thursday night, which would start at five percent on June 10 and rapidly increase to pressure the Mexican government to clamp down on the flow of migrants from Central America to the southern US border.

"If maintained, the tariffs would reduce US GDP growth by at least 0.7 (percentage point) in 2020 and likely push Mexico into a recession," Gregory Daco of Oxford Economics said in a research note.

"Importantly, the massive supply chain disruptions, significantly tighter financial conditions and depressed private sector confidence would amplify the direct tariff shock and increase the odds of a US downturn."

Mexico's top diplomat for North America lashed out after the tariffs announcement, describing the move as "disastrous" and vowing to respond "vigorously."

"If this threat is carried out, it would be extremely serious," said Jesus Seade, under-secretary for North American affairs at the Mexican foreign ministry.

The measures also could derail efforts to enact the new North American free trade pact, the US-Mexico-Canada Agreement or USMCA.

- Direct hit to carmakers -

But President Andres Manuel Lopez Obrador was more restrained, saying in an early morning news conference on Friday that Mexicans and Americans are in favor of free trade and Trump's shock announcement on Thursday will not change Mexico's plans to ratify the USMCA.

"This does not stop the process that began in order to ratify the treaty. We are going to move forward," Lopez Obrador said.

He said Mexico is willing to listen to Washington but said his government is already working to stem the tide of immigration, which Trump has repeatedly labeled a crisis and an invasion.

The United States imports more than $350 billion in goods from Mexico including $128 billion in autos, auto parts and engines key to the integrated North American auto market, which already is facing challenges and massive layoffs.

Deutsche Bank Securities said in an analysis that Trump's move "could cripple the industry and cause major uncertainty" and deliver a financial blow that would weaken US producers against their foreign competitors.

The Business Roundtable urged Trump to reconsider.

"Imposing unilateral tariffs on Mexican imports would be a grave error," the group said in a statement, warning that this "would create significant economic disruption and tax US workers, farmers, consumers and businesses."

Trump is using national emergency powers to unilaterally impose the tariffs citing an immigration crisis, but in a tweet on Friday he said the duties would help restore the US auto industry.

"In order not to pay Tariffs, if they start rising, companies will leave Mexico, which has taken 30% of our Auto Industry, and come back home to the USA," he said on Twitter.

"Mexico has taken advantage of the United States for decades."

- Heaping pain on farmers -

Retaliation by Mexico could heap further damage on American farmers already suffering from Trump's trade war with China, as well as flooding and wet weather.

AccuWeather predicted Friday that US corn yields would fall nine percent compared to 2018, while soybeans would decline four percent.

The White House last week announced a $16 billion aid package for farmers, following $12 billion in assistance in 2018 to help compensate for Beijing's retaliation.

Dave Salmonsen, a trade policy specialist for the American Farm Bureau Federation, noted that Mexico "is a huge market for us" and consumers and farmers could both feel the pain.

"Fresh food crosses the border everyday so the consequences on fresh fruits and vegetables would be fairly immediate," he told AFP, noting especially the hit to tomatoes, avocados and other seasonal fruits.

"Also all the different beers and tequila."

And if Mexico retaliates, that would damage corn and soybeans, he said, noting that Mexico is now the second largest market for US food and agriculture because of the trade war with China.

Ironically, the hit to the US economy might bring about something Trump has been demanding from the Federal Reserve: an interest rate cut.

While the US central bank has said it will remain patient while assessing incoming economic data, financial markets have sharply increased forecasts that it will lower rates as soon as this year.

Stock markets, which Trump frequently refers to as proof his policies are working, did not like the tariff announcement, with all three major indexes down about one percent by mid-morning.