Trump tariffs on Mexico threaten to undercut US economy

US president Donald Trump has trumpeted the robust US economy but hitting all products from Mexico with 25 per cent tariffs threatens to undercut growth and undermine key American industries, economists warn.

Trump announced the tariffs on Thursday night, which would start at five percent on 10 June and rapidly increase to pressure the Mexican government to clamp down on the flow of migrants from Central America to the southern US border.

The announcement was met with an outcry from business groups, retailers and trade experts, who also warned of the damage to relations not just with Mexico, but also with China and other trading partners who would no longer trust US negotiators.

"If maintained, the tariffs would reduce US GDP growth by at least 0.7 (percentage point) in 2020 and likely push Mexico into a recession," Gregory Daco of Oxford Economics said in a research note.

Mexico's top diplomat for North America lashed out after the tariffs announcement, describing the move as "disastrous" and vowing to respond "vigorously."

Trump's latest aggressive tariff strike was all the more shocking as it came days after he removed a key hurdle to approval of the new North American free trade pact when he lifted tariffs on steel and aluminum from Canada and Mexico.

Trade experts warned the punitive measures could derail efforts to enact the US-Mexico-Canada Agreement or USMCA, and cause Chinese negotiators -- already on the defensive after repeated attacks by Trump -- to be even more reticent to move forward with negotiations, when he could reverse course at any moment.

But president Andres Manuel Lopez Obrador was more restrained, saying in an early morning news conference on Friday that Mexicans and Americans are in favor of free trade and Trump's shock announcement will not change Mexico's plans to ratify the USMCA.

"This does not stop the process that began in order to ratify the treaty. We are going to move forward," Lopez Obrador said.

Direct hit to carmakers
He said Mexico is willing to listen to Washington but said his government is already working to stem the tide of immigration, which Trump has repeatedly labeled a crisis and an invasion.

Trump is invoking national emergency powers to unilaterally impose the tariffs citing an immigration crisis, but in a tweet on Friday he said the duties would help restore the US auto industry.

"In order not to pay Tariffs, if they start rising, companies will leave Mexico, which has taken 30% of our Auto Industry, and come back home to the USA," he said on Twitter.

"Mexico has taken advantage of the United States for decades."

However, the US Chamber of Commerce, the country's powerful business lobbying group, sharply criticized the plan saying "tariffs will be paid by American families and businesses without doing a thing to solve the very real problems at the border."

Chamber officials said they are looking at legal actions to challenge the tariffs, including Trump's use of emergency powers.

Edward Alden, of the Council on Foreign Relations, called the use of the emergency powers act "a flagrant abuse of the congressional statute" that is meant to deal with US enemies, not allies.

However, William Reinsch a former trade official and congressional staffer said the statute -- which has been used against countries like Libya and North Korea -- is worded in a way that makes legal challenges difficult while Congress had few options "short of passing a statute with a veto proof majority."

Mexico in January became the largest US trading partner, dethroning China.

The United States imports about $350 billion in goods from Mexico including $128 billion in autos, auto parts and engines key to the integrated North American auto market, which already is facing challenges and massive layoffs.

Deutsche Bank Securities said in an analysis that Trump's move "could cripple the industry and cause major uncertainty," delivering a financial blow that would weaken US producers against their foreign competitors.

The report said 25 per cent tariffs would amount to just short of $90 billion a year, with $23 billion hitting autos.

Economist Mary Lovely of Syracuse University called the move "another attack on supply chains," and said Trump does not seem to realize that nearly 70 percent of imports from Mexico are to affiliate companies in the United States.

Heaping pain on farmers
Retaliation by Mexico could heap further damage on American farmers already suffering from Trump's trade war with China, as well as the flooding and wet weather that are expected to reduce crop yields sharply.

The White House last week announced a $16 billion aid package for farmers, following $12 billion in assistance in 2018 to help compensate for Beijing's retaliation.

Dave Salmonsen, a trade policy specialist for the American Farm Bureau Federation, noted that Mexico "is a huge market for us" and consumers and farmers could both feel the pain.

He told AFP tomatoes, avocados -- nearly 90 per cent of which come from Mexico --- and other seasonal fruits would be hit hard, as well as "all the different beers and tequila."

And if Mexico retaliates, that would damage corn and soybeans, he said, noting the country now is the second largest market for US food and agriculture because of the trade war with China.