President Trump U.S. Mexico Trade

President Donald Trump discusses the U.S.-Mexico trade agreement Aug. 27, 2018. 

President Donald Trump’s vow to impose tariffs on all Mexican goods over illegal immigration threatened to increase costs for automakers and other manufacturers and left Mexico’s president calling to resolve the issue “with dialogue.”

Trump opened a new front in his trade wars, threatening to place escalating tariffs on Mexico and jeopardizing a new North American trade agreement. Mexico is by far the largest source of U.S. auto imports, and tariffs on goods from there would increase costs for many major manufacturers.

“These measures aren’t beneficial for Mexicans or Americans,” Mexican President Andres Manuel Lopez Obrador said in a press conference Friday. He has not received a response from Trump to a letter he sent the American president overnight calling for talks.

The latest move announced May 30 by the self-described Tariff Man would put 5% American duties on all Mexican imports on June 10, rising in increments to 25% in October unless Mexico halts “illegal migrants” heading to the U.S.

Trump warned that the levy “would gradually increase until the illegal immigration problem is remedied at which time the tariff will be removed.”

The move, which has major implications for American automakers and other companies with production south of the border and the U.S. economy as a whole, represents Trump’s latest expansion of his trade wars. It comes just days after he removed steel tariffs on Mexico that had caused retaliation against U.S. farm products.

It also marries two of his signature issues — trade and immigration — as he ramps up his campaign for re-election in 2020.

Consumer hit

The value of cars, trucks, buses and special purpose vehicles imported into the U.S. from Mexico totaled about $68 billion last year, according to the U.S. Census Bureau.

“Tariffs will mean higher price tags on cars for sales in U.S. and that will hit sales,” said Seiichi Miura, an analyst at Mitsubishi UFJ Morgan Stanley.

Initial reaction from Mexican officials was measured, with Obrador saying in a letter to Trump posted on Twitter that “I don’t want confrontation.” Lopez Obrador said his foreign minister and other officials would visit Washington to seek agreement.

Jesus Seade, Mexico’s undersecretary of foreign relations for North America, told reporters in Mexico City May 30 at a previously scheduled event that the country won’t retaliate before discussing the matter with the U.S. But the tariff threat, he added, “if turned into reality, would be extremely serious.”

Economists warned the move could hurt both countries. Mexico’s exports to the U.S. account for about four-fifths of total overseas shipments, or about 28% of its gross domestic product, according to Bloomberg chief economist Tom Orlik.

For the U.S. economy, 5% tariffs on $346 billion of Mexican imports means a price tag of about $17 billion, which rises to $87 billion if the taxes increase to 25%. American consumers will feel the impact more than they did with the China tariffs, as price increases for items like food are more directly observable, Orlik said.

Emergency powers

To impose the potential tariffs, Trump said he’s invoking authorities under the International Emergency Economic Powers Act, a tool that’s used to impose Treasury sanctions. Analysts and lawyers raised questions about the legality of using it in this context.

“This is a misuse of presidential tariff authority and counter to congressional intent," Republican Senator Chuck Grassley of Iowa said in a statement May 30. "I support nearly every one of President Trump’s immigration policies, but this is not one of them."

The tariff move came the same day that Trump presented notice to Congress to pass his renegotiated version of the North American Free Trade Agreement, which has allowed tariff-free trade with Mexico and Canada since it came into effect in the 1990s.

The administration said Thursday’s plan to increase tariffs on its southern neighbor was not linked to Trump’s NAFTA replacement, the United States-Mexico-Canada Agreement, which the White House is presenting as his No. 1 legislative agenda item.

Acting White House chief of staff Mick Mulvaney told reporters May 30 that the potential tariffs aren’t part of a trade dispute but about the immigration problem. He added that if the White House finds enough cooperation from Mexico over the coming weeks, the tariffs will either not take effect or will be lifted swiftly.

Acting Homeland Security Secretary Kevin McAleenan laid out what he called “key opportunities for enhanced partnership with Mexico” that could spare the country from increased duties. McAleenan listed the need for Mexico to step up its security efforts at its border with Guatemala, a crackdown on transnational criminal organizations and more cooperation and alignment on asylum policy.

If the U.S. imposes the tariffs, it will be violating NAFTA as well as World Trade Organization commitments, said Kenneth Smith Ramos, who was Mexico’s chief negotiator for the USMCA when it was negotiated with the U.S. and Canada last year.