Trump's Proposal to Impose Tariffs on Mexican Imports Creates Widespread Concern

By Navarro, Carlos | SourceMex Economic News & Analysis on Mexico, February 1, 2017 | Go to article overview

Trump's Proposal to Impose Tariffs on Mexican Imports Creates Widespread Concern


Navarro, Carlos, SourceMex Economic News & Analysis on Mexico


US President Donald Trump's administration has threatened to impose a 20% tariff on all Mexican imports, a move that could cause major disruptions to trade between the two countries and increase the cost of many goods for US consumers. Trump's presidential spokesperson, Sean Spicer, raised the possibility of the tariff after Mexican President Enrique Pena Nieto cancelled a meeting with Trump that had been scheduled for the end of January.

At the meeting, Trump was reportedly going to press Pena Nieto for a commitment to pay for the construction of a massive wall along the US-Mexico border, a project that would cost as much as US$25 billion (SourceMex, Jan. 18, 2017).

Spicer raised the possibility that the Trump government might impose the tax during conversations with beat reporters. "By doing it that way, we can do US$10 billion a year and easily pay for the wall just through that mechanism alone. That's really going to provide the funding," the press secretary said. According to the Office of the US Trade Representative, Mexico's exports to the US in 2015 were valued at $316.4 billion. The trade deficit is estimated to be $50 billion.

Economic and political observers generally agree that imposing a 20% tariff would have negative repercussions on both the Mexican and US economies, but particularly on the latter. "Who is going to pay? US consumers, because prices are going to increase a little bit," said Gabriel Casillas, chief economist at Grupo Financiero Banorte.

Gutting NAFTA

The tariff would also have the effect of gutting the North American Free Trade Agreement (NAFTA, the free trade deal between Mexico, Canada, and the US), which could hurt employment levels in both the US and Mexico. Under NAFTA, the majority of Mexican exports do not pay an import tax in the US. At its inception, NAFTA established a timetable to reduce tariffs on products, and most of these have been met.

"As long as the agreement is in place, no taxes can be imposed on Mexican products," columnist Enrique Quintana wrote in the daily business newspaper El Financiero. "If the Trump government decides to leave NAFTA, then it must give formal notification, and allow six months before the changes can be put in place."

In an editorial, The New York Times noted that imposing a tariff on Mexico would mean "pulling out of NAFTA, a move that would severely disrupt the flow of parts and goods across North America and stall production in factories in the United States and Canada."

The US economy relies strongly on imports from Mexico, with imports of motor vehicles and auto parts topping the list. The US imported US$21.5 billion in motor vehicles and US$51.6 billion in auto parts in January-November 2016, according to the US Department of Commerce. Imports of these products accounted for about one-fourth of total imports from Mexico. "Mexican auto parts are found in virtually all 11 million cars made in the United States," The New York Times said.

Higher US consumer prices

The tariff could also have the effect of raising prices for gasoline and other hydrocarbons, as crude oil is a major US import from Mexico. According to the Commerce Department, the US imported about 200 million barrels of Mexican crude in January-November 2016 at a cost of US$7 billion.

Additionally, many other products are imported from Mexico, including foodstuffs, agricultural products, and beverages. According to the Office of the US Trade Representative (USTR), imports of fresh vegetables now amount to about US$4.8 billion a year. In addition, the US imports about US$1.7 billion in snack foods and US$1.4 billion in processed fruits and vegetables, said the USTR.

Beer is another popular import that could be affected by the tariff, and this has raised concerns among industry insiders. Constellation Brands, which imports popular Mexican beers like Corona, Modelo, and Parifico, would have to charge more for these brands in the US market. …

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