Mexico Warns Retaliation: US Backtracks on Threatened Tariffs

Mexico Warns Retaliation: US Backtracks on Threatened Tariffs

Mexico Warns Retaliation

US Backtracks on Threatened Tariffs

US President Donald Trump has made an announcement on May 30th that the United States is planning to impose a 5% tariff on all Mexican exports to America on June 10th. This policy is aiming at forcing the Mexican government to resolve the problem of illegal immigrants crossing the border to the United States.  He also noted that if the migration situation is not improving, the tariff will gradually increase, reaching 25% on October 1st.

Trump back-tracked claiming that before launching the new tariffs, he will give Mexico a year to curb illegal cross-border behaviour, which eased the threat he had proposed before to completely close the Mexico border and install tariffs next week. The Mexico government then responded that if the United States implements the new tariffs, Mexico will strongly strike back.

Mexico’s Economy Minister Graciela Márquez said that if the United States continues to implement tariffs, Mexico can take several routes in response. The first is to resort to multilateral organizations such as the World Trade Organization, even though these processes are time-consuming and with no-prevail. The other is to impose tariffs on selected US goods for retaliation. Last year in 2018, Mexico imposed tariffs on US imports to the tune of US$3 billion, including bourbon, pork and steel products. The dispute was resolved in an agreement reached last month in May. The US trade representative announced that it would cancel the tariffs on  Canada and Mexico’s steel and aluminium, and in-return Canada and Mexico will also repeal its retaliatory tariffs on US goods.

At the end of November last year, the representatives of the United States, Mexico, and Canada signed a new trade agreement, the USMCA, replaced the North American Free Trade Agreement (NAFTA) established in 1994. If the US implements new tariff policies against Mexico, it would be a conflict to the original intention of recently established agreement.

The impact of New Tariffs

Imposing tariff is a double-edged sword that not only hurts both parties but also affects the world economy and leads to a significant volatility in global financial markets. Mexico is famous for its agricultural products such as avocados and agave, it’s also a manufacturing centre and the location of many American companies factories. Such as Ford Motors, General Motors, John Deere, IBM and Coca-Cola. Despite many American companies basing operations in Mexico, there are thousands of other multinational companies operating there as well.

As the tariff news broke, the Mexican peso depreciated against the US dollar, and the decline of US stock futures have also expanded.

According to Mexican officials, threatening tariffs would hurt both economies, and the effect on consumers and employment is much greater than the direct currency impact on Mexico’s annual US$350 billion exports to the US. Mexico’s deputy foreign minister and chief trade negotiator, Jesús Seade claimed that as a result of the supply chain integration, some auto-parts will cross the border about eight times before the final assembly of the vehicle, each time incurring a 5% tariff. The US Consumer News and Business Channel (CNBC) published an article on June 1st, saying that a 5% tariff on Mexican exports to the US will lead to a surge in vehicle pricing, and many Americans will be forced to abandon their future car purchase plans.

Some of the Japanese automobile companies’ share-price, such as Mazda, Nissan and Honda, experienced a steep decline as the cars consumers receive in the US are manufactured in Mexico. The Nikkei 225 index fell more than 1% after the announcement, hitting a new low since February. It is highly likely that the US-Mexico tariff policy will indirectly increase the trade friction between the US and Japan.

Mexico’s response to Migration issues

There is no doubt from either side of politics in the U.S. that illegal immigration is an issue. From January to April this year, the Mexico government has arrested more than 51,000 illegal immigrants, which is an increase of 17% over the same period last year. The reason for the illegal immigrant is mostly because of low living standards in their home country. The new tariff would possibly further weaken the Mexican economy and could prompt more Mexicans to cross the border, which is contrary to the Trump administrations original objective on US-Mexico immigration issues.

The Mexican government has indicated that it has stepped up its efforts in Southern Mexico to curb immigration inflows. Since December last year, more than 80,000 people have been returned to their country of origin, predominantly to Honduras, Guatemala and El Salvador. Mexico also said that without these efforts, a further 250,000 immigrants would reach the US border this year.

The Mexican government claimed it has always been cooperative with the US on dealing with immigration issues. Mexican President Andrés Manuel López Obrador insisted that dialogue is the way to resolve disputes and that he hopes to maintain friendly relations with Mr Trump and the U.S.

By Louis Cai

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