Why you should care
Because the tariffs would hit pocketbooks unevenly.
If President Donald Trump goes ahead with his threat to levy escalating tariffs on all Mexican exports to the United States starting June 10 — although U.S. and Mexican officials were trying to strike a deal this week — 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 percent of its exports — mostly manufactured goods — are sent to the U.S. 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 U.S. to have a weaker neighbor?”
Here is a look at how some of the tariffs could affect economies on both sides of the border:
U.S. states that rely on imports from Mexico
The U.S. Chamber of Commerce estimates a 5 percent tariff would cost U.S. consumers $17.3 billion a year, rising to almost $87 billion if Trump applied his 25 percent tariff threat in full. Mexico accounted for 15 percent of total U.S. imports in the first quarter, overtaking Canada and China to be America’s top trading partner.
Among U.S. states that stand to be hardest hit are Arizona, where 40 percent of its total imports come from Mexico; Michigan, at 38 percent; Texas, at 35 percent; and New Mexico, at 31 percent. The top U.S. imports from Mexico are cars, oil, electronics, machinery and fruit.
Beer and guacamole
Mexico is the world’s biggest exporter of beer, selling $3.6 billion worth to the U.S. last year, along with $2 billion in avocados and $2 billion in tomatoes. Those three categories alone stand to lose almost $400 million a year from the impact of a 5 percent tariff.
The U.S. imported $28 billion of agricultural products from Mexico in 2018, including almost $6 billion in fresh vegetables and $6 billion in fruit. Mexico estimates that a 5 percent levy would cost the sector almost $4 million a day, or $1.4 billion a year, rising to $6.7 billion a year if the 25 percent levy is applied.
Alberto Ramos, economist at Goldman Sachs, said in a note to clients that the bank saw a 70 percent probability of the initial 5 percent 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 percent on July 1.” The tariffs would probably remain at that level until the dispute was resolved, perhaps by the autumn, he said.
How Mexico could fight back
In past trade disputes, Mexico has applied tariffs “surgically” to maximize political pain. Trump’s presidential victory in 2016 was clinched by wins in Midwestern battleground states such as Wisconsin and Michigan, so any impact to the economy there could make his 2020 reelection 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 percent this year if a 5 percent tariff was applied, or contract 1.8 percent if the 25 percent threat was 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 percent if a 5 percent tariff was applied.
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 U.S. president made his announcement. The losses were extended on Monday.
However, a 5 to 10 percent tariff would be “far from devastating” and would not alter bilateral trade flows, Ramos of Goldman noted. He added that the depreciation of the peso would shore up Mexican exporters’ competitiveness and even help exporters lower prices and thus cushion the impact of the move on U.S. consumers.
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