President Trump is calling for the Administration to impose a 5% tariff rate on all Mexican imports starting next week.
According to the US president, the two countries have been negotiating for the last 25 years, but there has been minimal progress witnessed in terms of action. To spur immediate response, the White House aims to impose higher tariffs, placing an incremental 5% every month starting June until October this year. By October, the rate will reach 25% and will remain until the Mexican authorities take deliberate action.
In 2018, the total trade deals of Mexico and the US equaled to $671 billion. The US imports from Mexico amounted to $371.9 billion, while exports stood at $299.1 billion, resulting in a US deficit of $72.7 billion. The US Treasury reported that the deficit for the fiscal year 2018 increased to $779 billion.
To narrow the trade gap or deficit, the US has been making significant strides in its tariffs with other countries, including China and Canada. Duties collected from higher taxes would also be advantageous to the government as it will shore up revenues to finance the general fund.
However, the actions taken by the US administration is affecting business sentiment and investor confidence. The ongoing trade war between the US and China is still on the table, and adding Mexico into the picture may aggravate the problem. Following President Donald Trump’s announcement on the tariffs, the equities market took a downturn. The S&P 500, Dow Jones and Nasdaq all retreated as investors carved the prospects of uncertainty.
Possible Impact for the Average American
Many are asking what the likely effects of US sanctions on imported goods are. For US businesses that rely on imports from other countries for its raw materials, it would translate to higher production costs. As the administration continues to elevate tariffs on products, their profits could be seriously injured. And since there is no existing hardline on when these tariffs will be eased or increased further, manufacturing industries and retailers will find it difficult to project their income. Unpredictability could hurt the economy, given that it limits productivity and output.
According to Gregory Daco of Oxford Economics, a 25% tariff imposition on Mexican goods will hamper GDP growth by 0.7% in 2020. It also translates to 600,000 fewer American jobs. Michael Feroli from JPMorgan and Chase co. estimate that the third quarter GDP could slow at 1.5%. The trade tensions surrounding Mexico can not only have the potential to affect current economic growth, but it can slide into the long term.
Meanwhile, American consumers may be the tail end recipient of this trade war. When the cost of goods increase, US citizens will have to pay more for the products they buy. If prices increase, consumer spending may be hampered, which happens to have a substantial contribution to the growth of the US economy. This applies more aptly to products that are considered luxury goods, to whom consumers will likely have a ‘wait and see’ period before they decide on buying such items.
Mexico is among the most significant foreign suppliers of food products in the US. In 2017, they contributed to around $26 billion in imports. Half of the food imports are fruits and vegetables. With higher tariffs, large US groceries and retailers will scramble to look for suppliers in other countries that can offer lower costs, which is not an easy task given the limited time before Trump imposes the sanction. The effect is almost immediate since US retailers cannot store in bulk perishable food items. Supermarkets may have no option left but to increase the price of food items to offset the higher costs.
For electronics, the effects are still unclear given that US authorities have to clarify whether the tariffs apply to import products made in Mexico or anything shipped from Mexico. Consumers are often sensitive to price changes in this market sector, and tech imports, including desktop computers, servers, televisions, refrigerators, and freezers may suffer from the trade policy.
Another impact of the tariff imposition is the automobile industry. Most vehicles used by Americans are primarily assembled in Mexico. These brands include Volkswagen, Fiat Chrysler, GM, and Renault-Nissan-Mitsubishi. The car industry will be put under pressure in the coming months. To avoid the spike in prices for these specific vehicle brands, they will instead even out the costs across other brands. According to Deutsche Bank, prices could rise by as much as $1,300 per vehicle. Trade jitters from these uncertainties have also contributed to the slump in shares of the automobile sector. Some analysts suggest that the most significant risk may result from investor worries rather than consumption risk. The hard fight on stocks is causing swings in the financial markets.
The Administration is Concerned About Immigration Policies
In a statement by the White House, the imposition of the tariffs will hopefully result in an immediate action by the Mexican government to control immigration. The current Republican’s message is clear: Every year, illegal immigrants come to the US in the hundreds of thousands, affecting the lives of US citizens. They allege that as more individuals and families cross the Southern border, Americans are concerned about them stealing jobs from the locals and take the privileges enjoyed by Americans, which overall affect economic activity and progress. These services, which are shared with illegal migrants, may range from healthcare, education, and social welfare programs. None of this is proven and illegal immigrants often work the difficult jobs Americans choose not to and suffer from lack of worker’s rights.
The primary concern, according to President Trump, is on national security. The migrant crisis has long been overdue, and there are severe repercussions on US soil. Transnational criminal organizations support these aliens in border crossing, and that threatens national security. Crime activities flourish due to the operations undermined by the Mexican government. These may include smuggling of goods such as drugs and narcotics, gang violence and human trafficking. With no strict compliance with law and order, US citizens suffer the blow. It is also unjust to the local taxpayers to whom the government shaves off money for funding illegal migration.
The White House believes that Mexico will take the necessary steps to prevent from being imposed higher duties. Mexican President Andres Manuel Lopez Obrador can Fastrack on migrant flows and keep its promise of helping in detaining illegal migrants within their asylum. Mexico can also seal its southern border with Guatemala, which spans over 150 miles.
President Trump has turned in a draft Statement of Administration Action, triggering its next move to hand in the United States Mexico Canada Agreement (USMCA) to Congress within one month for approval. This proposal details the trade deal agreements negotiated by Canada, Mexico, and the US in the previous year. USMCA will override the North American Free Trade Agreement in 1994 to balance the growth of both the US and the North American economies.
To even the playing field for all parties concerned, the agreement will improve on the welfare of American workers, establish US protection rights, enhance the agricultural and food sector trade in North America, and set the guidelines for good governance on trade.
The administration’s goal is to ratify the proposal by summer. They have been pushing House Speaker Nancy Pelosi and the Democrats from Congress to speed the process. However, Pelosi responded by stating that Congress will have to review the proposal thoroughly. The Democrats voiced issues on labor enforcement and environmental protection.
In response to the White House, President Obrador wrote a letter stating that Mexico would want to settle this dispute peacefully. Instead of dropping public statements, he opts to negotiate meaningfully through carefully weeding out the contents on trade policies. He has also requested an official meeting last Friday to start the discussions.
On the same day, President Obrador had suggested it could look at the possibility of tightening its policies on migration and looks forward to a fruitful discussion in Washington DC.
Critics have raised dissent to President Trump’s action. Among them is US Senate Finance Committee Chairman Chuck Grassley, who pointed out that trade and border security are two separate issues that need to be dealt with separately.
Meanwhile, others are doubtful if Trump will push through with his plans. Some of his threats have been only used as a strategy to gain leverage. Louisiana Senator John Kennedy expressed this on CBS stating Trump will not proceed with the tariffs especially with its impact on the US economy. Additionally, Grassley noted that the threats would prevent the UMCA proposal from being approved by Congress.
On June 2, US and Mexican officials will meet to discuss on border policies. Mexican Economy Minister Graciela Marquez will be speaking with US Commerce Secretary Wilbur Ross. This coming Wednesday, there will also be talks between Mexican Foreign Minister Marcelo Ebarb and US Secretary of State Mike Pompeo. Market watchers will wait for further developments from these talks.