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Trump to impose 5% tariff on Mexican goods

The tariff would take effect June 10 in retaliation for migrants entering U.S.

May 31, 2019

6 Min Read
Leon Neal/GettyImages

by Jenny Leonard and Shawn Donnan

President Donald Trump vowed to impose a 5% tariff on Mexican goods until that country stops immigrants from entering the U.S. illegally, brandishing a weapon used against a widening group of countries and jeopardizing a new North American trade agreement.

The tariff would take effect on June 10, “until such time as illegal migrants coming through Mexico, and into our country, STOP,” Trump said in a Twitter post on Thursday night.

He warned that the levy “would gradually increase until the illegal immigration problem is remedied at which time the tariff will be removed.” The tariffs could rise as high as 25% on Oct. 1, Trump said in a statement released by the White House.

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.

Markets React

The Mexican peso weakened by as much as 3% after Trump’s tweets, while investors fled to the safest assets as concerns over new trade conflicts mounted. The yen strengthened and S&P 500 index futures tumbled, heading for their worst week since the global rout in December. German bund yields sank to a record as investors sought havens. Auto stocks were pummeled in European trading, with FiatChrysler down 4.6%.

Initial reaction from Mexican officials was measured, with President Andres Manuel Lopez 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 the following day to seek agreement and added that he’s not a coward and is acting on principles.

Jesus Seade, Mexico’s undersecretary of foreign relations for North America, told reporters in Mexico City Thursday 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.

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 Thursday. "I support nearly every one of President Trump’s immigration policies, but this is not one of them."

Iowa’s other Republican senator, Joni Ernst, also criticized Trump’s move. “While I support the need for comprehensive border security and a permanent fix to illegal immigration, this isn’t the right path forward,” she said in a statement Friday. “I’m asking the president to reconsider, and for Democrats to work with us to find a solution to the humanitarian crisis at our southern border.”

Illegal Immigration

Trump made curtailing undocumented immigration a centerpiece of his presidency and campaign. He ran in 2016 on promises to build a border wall to keep out migrants and declared a national emergency to tap federal funds for construction, after Congress didn’t provide as much money as the president demanded.

This month, U.S. Customs and Border Protection said in a tweet that it had apprehended 45 “large groups” of migrants that included more than 7,900 individuals. On Wednesday, the agency said it stopped 1,036 people south of downtown El Paso, Texas -- the largest group of undocumented immigrants it ever encountered, according to a Customs and Border Protection statement.

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 said on a call with reporters Thursday night 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.

“Under NAFTA you cannot increase tariffs unless there are trade remedy investigations or something that is allowed under the agreement,” he said. “So it would be a clear market access violation.”

    What Bloomberg’s Economists Say...

    “The read across from Mexico to China will add to concerns that talks between Washington D.C. and Beijing are going nowhere. Mexico negotiated revisions to NAFTA, only to be hit with sweeping higher tariffs. Other countries, including China, will be taking note, perhaps concluding that negotiated agreements with the U.S. are of little worth."

    -- Chang Shu, Yuki Masujima, Tom Orlik

Rufus Yerxa, president of the National Foreign Trade Council, a business group representing U.S. companies, said the move was a huge blow to the American economy and casts serious doubt on passage of the new trade deal. “There goes USMCA!” he said. “What trading partner is ever going to trust this administration to honor deals?”

With the move to impose tariffs Trump is reaching for one of his favorite policy tools to pursue a broader policy goal. But he also faces risks of a backlash with polls showing the import taxes he has imposed on goods from China and elsewhere are not popular.

“This is a dramatic escalation that will likely make it impossible for Mexico to continue cooperating with this administration on trade or on controlling asylum flows from Central America,” said Edward Alden, a senior fellow at the Council on Foreign Relations. “Mexico has negotiated in good faith throughout on the USMCA, and has tried to work with the administration on migration. Unless this tariff is quickly reversed, it will kill cooperation on both.”

--With assistance from Nacha Cattan, Justin Blum, Ruth Carson, Eric Martin and Michelle Jamrisko.

To contact the reporters on this story:

Jenny Leonard in Washington at [email protected];

Shawn Donnan in Washington at [email protected]

To contact the editors responsible for this story:

Margaret Collins at [email protected];

Michael Shepard at [email protected];

Malcolm Scott at [email protected]

© 2019 Bloomberg L.P.

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