How Trump's Mexico threat imperils his own economic agenda

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A worker carries a bunch of harvested bananas to be exported, at a farm in Ciudad Hidalgo, Chiapas state, Mexico, Friday, May 31 2019. If the tariffs threatened by United States President Donald Trump on Thursday were to take effect, Americans may see higher prices in grocery stores. The U.S. imports $12 billion of fresh fruits and vegetables from Mexico. (AP Photo/Marco Ugarte)

President Donald Trump's vow to impose new tariffs on Mexican imports risks sabotaging not just his drive to forge more favorable trade deals but also a U.S. economy that he says has strengthened under his watch.

Trump announced Thursday that he would impose a 5% tax on all Mexican imports on June 10 — and raise it to 25% by Oct. 1 — unless Mexico stopped a surge of Central American migrants into the U.S. That would swell the prices Americans pay for countless items from avocadoes to clothes to medical devices.

His threat, which drew an outcry from a broad span of business groups and political figures, suddenly cast doubt on prospects for a new North American trade agreement. Trump last year negotiated the deal, formally called the U.S.-Mexico-Canada Agreement, or USMCA, and billed it a triumph of his economic policymaking.

The USMCA must be approved by lawmakers in all three countries. Yet Mexico is unlikely to ratify the pact if it must cope with a new batch of Trump-imposed tariffs just months after forging a free-trade agreement with the administration. The very point of free-trade pacts, after all, is to liberate countries from tariffs and other protectionist policies that hurt their exporters.

"It's very hard to see the USMCA going forward after this," said Philip Levy, who was a White House economist under President George W. Bush and is now a senior fellow at the Chicago Council on Global Affairs. "The president has essentially told the Mexicans that the deal offers them no guarantees against (U.S.) trade protectionism. It asks them to jump through hoops with no reward."

Stock markets sank Friday on the news. The Dow Jones industrial average lost about 355 points, or 1.4%.

If Trump were to proceed with a series of escalating tariffs on goods from Mexico, the economic damage could be far-reaching. Mexico is all but sure to retaliate with its own tariffs and probably aim them at U.S. farm products. Mexico last year bought $300 billion worth of U.S. goods and services, second only to Canada. And the United States imported $378 billion from Mexico, No. 2 to China.

U.S.-Mexico trade includes significant business between auto suppliers and assembly plants that are interwoven in complex cross-border supply chains. Products that are traded between the two countries tend to cross each other's borders multiple times. Many automakers, including General Motors Co., ship vehicles manufactured in Mexico into the U.S. Those cars could be subject to Trump's tariffs.

"The suddenly renewed potential for tariffs on goods from Mexico revives a risk (for automakers and suppliers) many believed was largely behind us" after the signing of the USMCA, said Itay Michaeli, auto analyst at Citi Research. "This new uncertainty is a clear negative for auto stocks."

Oxford Economics has forecast that 25% U.S. tariffs on Mexican imports, if maintained, could deal a heavy blow to the U.S. economy. It estimated that the import taxes would subtract at least 0.7 percentage point from U.S. economic growth in 2020, reducing growth to a frail 1% or less.

Mexico's faltering economy could slide into an outright recession, Oxford estimates.

The timing of Trump's threatened new tariffs was puzzling, suggesting a chaotic internal policymaking process. Trade Representative Robert Lighthizer and other officials with trade portfolios weren't involved in the final discussions Thursday and privately expressed their opposition to the move, according to the three people with knowledge of the matter who spoke on the condition of anonymity.

Trump's decision came less than two weeks after he agreed to lift tariffs on Mexican and Canadian steel and aluminum — a move that seemed to clear a key hurdle to passing the USMCA. And it came the same day that Vice President Mike Pence visited Canada to promote that deal and that the administration sent Congress a notification meant to start the legislative process for ratifying the USMCA.

The administration insists that the threat to impose new tariffs on Mexico is a tool of immigration policy and doesn't signal the start of a new trade fight or amount to a negotiating ploy in the final wrangling over USMCA.

"This is not a tariff war with Mexico in any way, shape or form," White House trade adviser Peter Navarro told CNBC on Friday.

But the move provoked condemnation even from some of Trump's fellow Republicans.

"Let's focus on solving the crisis at the border but not hurt our economy and endanger an important @POTUS goal -- a better trade deal w/ #Canada & #Mexico," Sen. Rob Portman of Ohio, who served as the top U.S. trade negotiator under President George W. Bush, tweeted.

Sen. Chuck Grassley of Iowa, chairman of the Senate Finance Committee, denounced the president's threat as a "misuse of presidential tariff authority" that would burden American consumers and "seriously jeopardize passage of USMCA."

The Constitution gives Congress power over the nation's trade policies. But over the years, lawmakers ceded authority to the White House. The big gun in the White House's trade arsenal is the International Emergency Economic Powers Act of 1977, which authorizes the president to declare a national emergency and impose economic sanctions, from freezing foreign assets to restricting investment in foreign countries.

The administration is invoking that law to justify potential new tariffs on Mexico. But the law has never been used to impose tariffs, and some legal experts say it can't. It doesn't say "that the president may impose tariffs on the importation of goods," said Dean Pinkert, a partner at Hughes Hubbard & Reed LLP and a former member of the U.S. International Trade Commission.

Congress is already considering scaling back the president's power over trade policy. It's taking aim in particular at a provision of a 1962 law that empowers him to impose trade sanctions on any imports he deems a threat to national security — a provision Trump has used to justify new tariffs.

Trump has led the United States into the biggest trade war since the 1930s. Accusing China of stealing U.S. technology and coercing American companies to turn over trade secrets, the president has imposed 25% tariffs on $250 billion in Chinese imports. And he plans to target the remaining $300 billion in products from China that haven't already been hit.

Eleven rounds of talks have failed to end the standoff with Beijing. Negotiations broke off several weeks ago after U.S. officials accused Beijing of reneging on commitments it had made in earlier rounds of negotiation.

Mark Zandi, chief economist at Moody's Analytics, noted that the two sides were widely expected to reach some kind of deal, perhaps if Trump meets Chinese President Xi Jinping at the Group of 20 summit in Osaka, Japan, in late June. But, Zandi wrote, "emotions now seem to be overtaking President Trump, and the odds that he will be able to get himself together sufficiently to come to terms with the Chinese in the coming month appear to be fading."

The administration is also trying to craft trade agreements with Japan and the European Union. To heighten pressure on the EU, it is threatening to tax auto imports as soon as the fall. Extending tariffs to auto would amount to a significant escalation in hostilities. The U.S. last year imported $192 billion worth of passenger vehicles and $159 billion in auto parts.

Jorge Guajardo, a former Mexican diplomat who is now a senior director at the McLarty Associates consulting firm, said he wonders why any country would agree to a trade deal with Trump after what's happened to Mexico.

"Bottom line: Trump likes (tariffs) and will always look for an excuse to levy them," Guajardo tweeted. "No country should delude itself thinking they can appease him to avoid them."

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AP writers Zeke Miller and Marcy Gordon in Washington and Tom Krisher in Detroit contributed to this report.

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Follow Paul Wiseman on Twitter at http://Twitter.com/PaulWisemanAP