If President Donald Trump goes ahead with his threat to levy escalating tariffs on all Mexican exports to the US from June 10, both countries’ economies and consumers will be hit hard.
Exports make up just over a third of Mexico’s gross domestic product, and some 80 per cent of its exports — mostly manufactured goods — are sent to the US. Integrated supply chains mean that in many cases, components cross the border many times. As Jesús Seade, Mexico’s undersecretary for North America and a veteran trade negotiator, said: “How is it in the interests of the US to have a weaker neighbour?”
Here is a look at how some of the tariffs could affect economies on both sides of the border:
US states that rely on imports from Mexico
The US Chamber of Commerce estimates a 5 per cent tariff would cost US consumers $17.3bn a year, rising to almost $87bn if Mr Trump applied his 25 per cent tariff threat in full. Mexico accounted for 15 per cent of total US imports in the first quarter, overtaking Canada and China to be America’s top trading partner.
Among US states that stand to be hardest hit are Arizona, where 40 per cent of its total imports come from Mexico; Michigan, at 38 per cent; Texas 35 per cent; and New Mexico 31 per cent. The top US imports from Mexico are cars, oil, electronics, machinery and fruit.
Beer and guacamole
Mexico is the world’s biggest exporter of beer, selling $3.6bn worth to the US last year, along with $2bn in avocados and $2bn in tomatoes. Those three categories alone stand to lose almost $400m a year from the impact from a 5 per cent tariff.
The US imported $28bn of agricultural products from Mexico in 2018, including almost $6bn in fresh vegetables and $6bn in fruit. Mexico estimates that a 5 per cent levy would cost the sector almost $4m a day, or $1.4bn a year, rising to $6.7bn a year if the 25 per cent levy is applied.
However, Alberto Ramos, economist at Goldman Sachs, said in a note to clients that the bank saw a 70 per cent probability of the initial 5 per cent tariff being applied and said it was “a close call but slightly more likely than not that the tariff rate on all goods steps up to 10 per cent on July 1”. The tariffs would probably remain at that level until the dispute is resolved, perhaps by the autumn, he said.
How Mexico could fight back
In past trade disputes, Mexico has applied tariffs “surgically” to maximise political pain. Mr Trump’s presidential victory in 2016 was clinched by wins in midwestern battleground states such as Wisconsin and Indiana, so any impact to the economy there could make his 2020 re-election arguments more difficult for voters to swallow.
The hit to Mexico’s economy
Mexico’s economy, which already suffered a surprise contraction in the first quarter, could grow just 0.6 per cent this year if a 5 per cent tariff is applied, or contract 1.8 per cent if the 25 per cent threat is levied, according to analysis by JPMorgan, with a cascading effect on gross fixed investment, job creation and consumer spending. JPMorgan also said the Bank of Mexico could raise interest rates by half a point to 8.75 per cent if a 5 per cent tariff is applied.
Mr Trump has intended the tariffs to squeeze Mexico’s economy until it gives in to his demands on illegal migration.
Meanwhile, the Mexican peso suffered its biggest one-day drop in seven months against the dollar last Friday when the US president made his announcement. The losses were extended on Monday.
However, a 5-10 per cent tariff would be “far from devastating” and would not alter bilateral trade flows, Mr Ramos of Goldman noted. He added that the depreciation of the peso would shore up Mexican exporters’ competitiveness and even help exporters to lower prices and thus cushion the impact of the move on US consumers.