How Trump's Mexico threat imperils his own economic agenda

President Donald Trump's vow to impose new tariffs on Mexican imports risks sabotaging not just his drive to forge more favourable trade deals but also a U.S. economy that he says has strengthened under his watch.

Trump announced Thursday that he would impose a 5 per cent tax on all Mexican imports on June 10 and raise it to 25 per cent by October 1 unless Mexico stopped a surge of Central American migrants into the U.S. That would swell the prices Americans pay for countless items from avocadoes to clothes to medical devices.

His threat, which drew an outcry from a broad span of business groups and political figures, suddenly cast doubt on prospects for a new North American trade agreement.

Trump last year negotiated the deal, formally called the U.S.-Mexico-Canada Agreement, or USMCA, and billed it a triumph of his economic policymaking.

The USMCA must be approved by lawmakers in all three countries. Yet Mexico is unlikely to ratify the pact if it must cope with a new batch of Trump-imposed tariffs just months after forging a free-trade agreement with the administration. The very point of free-trade pacts, after all, is to liberate countries from tariffs and other protectionist policies that hurt their exporters.

"It's very hard to see the USMCA going forward after this," said Philip Levy, who was a White House economist under President George W. Bush and is now a senior fellow at the Chicago Council on Global Affairs.

"The president has essentially told the Mexicans that the deal offers them no guarantees against (U.S.) trade protectionism. It asks them to jump through hoops with no reward." Stock markets sank Friday on the news. The Dow Jones industrial average lost about 355 points, or 1.4 per cent.

If Trump were to proceed with a series of escalating tariffs on goods from Mexico, the economic damage could be far-reaching. Mexico is all but sure to retaliate with its own tariffs and probably aim them at U.S. farm products.

Mexico last year bought USD300 billion worth of U.S. goods and services, second only to Canada. And the United States imported USD378 billion from Mexico, No. 2 to China.

U.S.-Mexico trade includes significant business between auto suppliers and assembly plants that are interwoven in complex cross-border supply chains.

Products that are traded between the two countries tend to cross each other's borders multiple times.

Many automakers, including General Motors Co., ship vehicles manufactured in Mexico into the U.S. Those cars could be subject to Trump's tariffs.

"The suddenly renewed potential for tariffs on goods from Mexico revives a risk (for automakers and suppliers) many believed was largely behind us" after the signing of the USMCA, said Itay Michaeli, auto analyst at Citi Research.

"This new uncertainty is a clear negative for auto stocks." Oxford Economics has forecast that 25 per cent U.S. tariffs on Mexican imports, if maintained, could deal a heavy blow to the U.S. economy. It estimated that the import taxes would subtract at least 0.7 percentage point from U.S. economic growth in 2020, reducing growth to a frail 1 per cent or less.

Mexico's faltering economy could slide into an outright recession, Oxford estimates.

The timing of Trump's threatened new tariffs was puzzling, suggesting a chaotic internal policymaking process.

Trade Representative Robert Lighthizer and other officials with trade portfolios weren't involved in the final discussions Thursday and privately expressed their opposition to the move, according to the three people with knowledge of the matter who spoke on the condition of anonymity.

Trump's decision came less than two weeks after he agreed to lift tariffs on Mexican and Canadian steel and aluminum a move that seemed to clear a key hurdle to passing the USMCA.

And it came the same day that Vice President Mike Pence visited Canada to promote that deal and that the administration sent Congress a notification meant to start the legislative process for ratifying the USMCA.

The administration insists that the threat to impose new tariffs on Mexico is a tool of immigration policy and doesn't signal the start of a new trade fight or amount to a negotiating ploy in the final wrangling over USMCA.

"This is not a tariff war with Mexico in any way, shape or form," White House trade adviser Peter Navarro told CNBC on Friday.

But the move provoked condemnation even from some of Trump's fellow Republicans.

"Let's focus on solving the crisis at the border but not hurt our economy and endanger an important @POTUS goal -- a better trade deal w/ #Canada & #Mexico," Sen. Rob Portman of Ohio, who served as the top U.S. trade negotiator under President George W. Bush, tweeted.

I support @POTUS’ proposals to fund border security & change certain laws that encourage people to come from Central America. Let’s focus on solving the crisis at the border but not hurt our economy and endanger an important @POTUS goal -- a better trade deal w/ #Canada & #Mexico

— Rob Portman (@senrobportman) May 31, 2019

Sen. Chuck Grassley of Iowa, chairman of the Senate Finance Committee, denounced the president's threat as a "misuse of presidential tariff authority" that would burden American consumers and "seriously jeopardize passage of USMCA." The Constitution gives Congress power over the nation's trade policies. But over the years, lawmakers ceded authority to the White House.

The big gun in the White House's trade arsenal is the International Emergency Economic Powers Act of 1977, which authorizes the president to declare a national emergency and impose economic sanctions, from freezing foreign assets to restricting investment in foreign countries.