Mexico President responds to Trump tariff threat

by Kim Boateng Posted on May 31st, 2019

President Andrés Manuel López Obrador said Friday that Mexico won’t panic over U.S. President Donald Trump’s threat of coercive tariffs — measures that economists say could have dramatic consequences for both nations and potentially spur a full-blown trade war.

Trump set a June 10 deadline for Mexico to do more to slow immigration through its territory or else all of its exports — from avacados and automobiles to machinery and household appliances — stand to be hit with 5% duties. And he threatened to possibly increase the tariffs incrementally, up to 25% in the subsequent months.

Tomato exporters in the northwestern state of Sinaloa, avocado growers in Michoacan and electronics factories in Tamaulipas, across the border from Texas, would all feel the pinch. So would U.S. companies and American consumers, to whom they would pass on the increased cost of doing business.

The threat also throws into question the future of the USMCA trade deal between the U.S., Mexico and Canada, hammered out in months of contentious negotiations as a replacement for the North American Free Trade Agreement, one of the Trump administration’s most touted achievements.

“It would really have a terrible impact on our producers and our exporters,” said Kenneth Smith Ramos, who led then-President Enrique Peña Nieto’s delegation to USMCA talks and is now an international trade consultant at Mexico City-based AGON.

“And it would hurt U.S. producers as well because they rely a lot on Mexican inputs for their production,” he added. “So it would reduce their competitiveness and force them to raise prices, which would ultimately of course hit consumers.”

The economic impact for Mexico was swift, with the peso dropping more than 3% against the U.S. dollar Friday morning. U.S. stocks likewise tumbled on Wall Street.

Initial macroeconomic projections from economists were are also chilling.

Analyst Alfredo Coutiño of Moody’s Analytics said Mexican exports to the U.S. totaled $358 billion last year, or 80% of all goods the country sold overseas. Over the course of a year, he said, a 5% tariff would represent about $18 billion in damage or 1.5% of Mexico’s GDP, while a 25% tariff would amount to $90 billion or 7.3% of GDP.

Banco Base estimated that a 5% tariff could knock 2.85 percentage points off growth of Mexico’s exports, but said a weaker peso would help compensate.

Such tariffs would “likely push Mexico into a recession,” as well as disrupt regional supply chains and hurt investor confidence, Oxford Economics economist Gregory Daco wrote in a report.

Coutiño said Mexico could impose retaliatory penalties, sparking a tariff war.

A second, “less aggressive but potentially more effective” option would be to allow the peso to depreciate to the point where the tariffs would be neutralized, he added.

López Obrador was betting on dialogue, seemingly convinced that Trump just needed to be informed of all that Mexico has been doing to slow illegal migration. To that end, he sent Foreign Affairs Secretary Marcelo Ebrard to Washington.

“We are carrying out our responsibility in immigration policy,” López Obrador said, while making no promises of new action to stem the flow of mostly Central American immigrants transiting Mexico to reach the U.S. border.

Mexico already has implemented policies and actions that seem aimed to discourage irregular migration and make it more difficult.

Last month, it raided the latest migrant caravan in the southern state of Chiapas, arresting hundreds and effectively breaking it up. There have been no significant caravans since then, with many migrants saying they now fear to travel in large groups.

Mexico also has deported thousands of migrants and frustrated thousands more who wait endlessly for permits that would allow them to travel legally through Mexico.

“We have to help so that they don’t enter the United States illegally, but we also have to do it respecting human rights,” said López Obrador, who espouses a longer-term, holistic approach focused on improving security, development and economic opportunity in places where migrants originate. “Nothing authoritarian. They’re human beings.”

López Obrador has lobbied the U.S. and other countries to support a Marshall Plan-like program for southern Mexico and the Northern Triangle region of Guatemala, Honduras and El Salvador.

But his medium- and long-term immigration solutions appear to be colliding with the political benefits for Trump of rallying his conservative base during an election cycle.

Trump resumed his Twitter complaints about the United States’ southern neighbor, saying that “Mexico has taken advantage of the United States for decades. Because of the Dems, our Immigration Laws are BAD. Mexico makes a FORTUNE from the U.S., have for decades, they can easily fix this problem. Time for them to finally do what must be done.”

Mexico can continue to make it more difficult for migrants to cross the country to the U.S. border, although the smugglers who have long plied those routes would likely benefit by being able to charge more. Mexico sealing its porous southern border with Guatemala is probably impossible because it lacks sufficient infrastructure to completely patrol a frontier that includes a river passing through dense jungle.

Trump’s threat came the same day Mexico announced it would begin the process of ratifying the USMCA and less than two weeks after it successfully negotiated the lifting of U.S. steel and aluminum tariffs that had been a roadblock to final approval for the trade deal.

Asked why Mexico would not just skip dialogue and file a complaint with an international trade body, López Obrador said it was not just a legal question: “We want to have a good relationship with the United States government.”

Smith Ramos, the former Mexican trade negotiator, argued there’s “no legal justification that the U.S. can use whatsoever to justify an increase in tariffs,” adding that “it’s likely that Mexico would have the same response in terms of immediate retaliation as we did in the administration previously on steel and aluminum.”

He called it a potential setback for the USMCA, while cautioning that it remains to be seen whether the threatened tariffs will end up going into effect or in what fashion.

“You saw yesterday the good news of the process of ratification sort of kicking off in Mexico, and then by the evening, it was all back to square one and even negative,” Smith Ramos said. “I mean it was just crazy.”

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