An American economy and shopper already bracing for an escalation in the U.S. trade war with China was hit by an equally damaging blow this week when President Trump unexpectedly ratcheted up his battle with Mexico.
From produce to cars, a wide variety of Mexican goods could become more expensive if Trump follows through on his threat to hit Mexican imports with tariffs that soon could climb to 25%. Trump wants to pressure Mexico into doing more to halt the flow of Central American migrants to the U.S. via the Mexican border.
The tariffs, set to begin June 10, would gradually climb to 25% on October 1 if Mexico doesn’t take steps “to dramatically reduce or eliminate” the number of migrants, Trump said on Thursday. Such a strategy would hurt American shoppers, the economy and stocks, experts say, just as U.S. growth is slowing and the threat of more tariffs on Chinese imports looms larger, experts say.
USA Today economics reporter Paul Davidson breaks down the potential impact.
How much does the U.S. import from Mexico?
Mexico is the second-largest exporter to the U.S. behind China, shipping $346.5 billion in goods to the country in 2018, up 10.3% from 2017. Top imports are vehicles, machinery, TVs, furniture, appliances and agricultural products such as avocados and other vegetables, and beer and wine.
Can Trump legally use tariffs to prod Mexico on immigration?
The International Emergency Economic Powers act of 1977 does give the president the authority to impose tariffs in a national emergency. Trump has said he regards the influx of migrants through Mexico as such a crisis, using it to justify a shutdown of the Mexican border earlier this year. But Fred Bergsten, co-founding president of the Peterson Institute for International Economics, says that claim is dubious and almost certainly would be challenged in court. Even if the border crossings represent an emergency, it’s highly questionable that Mexico could stop them, he says. A federal judge could issue a stay that removes the tariff while the case is hashed out in court, Bergsten says.
How much would prices go up?
A 5% tariff would likely be absorbed by retailers and manufacturers. But much of a 25% tariff likely would be passed to shoppers, Bergsten figures, increasing costs by up $86 billion across the economy. The Trade Partnership, a research group, reckons the tab could be substantially lower as higher fees reduce imports.
Let’s break it down. How about car prices?
While a 5% tariff could have no effect, prices could go up by several thousand dollars per model in the worst case scenario — permanent 25% tariffs, says Jeff Schuster, president of global vehicle forecasting at LMC Automotive.
For example, a $30,000 vehicle imported from Mexico would suddenly be hit with $7,500 in duties. How much automakers pass on to consumers depends on how long the tariffs last, he says.
Key models imported from Mexico to the U.S. include, for example, the second and third most popular models in America: Fiat Chrysler’s Ram pickup and GM’s Chevrolet Silverado pickup. Automakers would want to avoid major spikes in individual models, choosing instead to spread out the costs across their entire lineup.
All told, Deutsche Bank projected an increase in prices of about $1,300 per vehicle.
“For the consumer I think initially it’s a wait and see, but it could become costly,” Schuster said.
And car parts would be affected, too. “So even holding on to an existing vehicle will become more expensive,” according to the Center for Automotive Research.
Where else will consumers feel the impact?
One of the first places is the supermarket. Mexico sold U.S. grocers $26.2 billion worth of food in 2017. The produce section is especially vulnerable. Half of Mexican food imports are fruits and vegetables. Produce has a shorter shelf life than items like beer, so U.S. supermarkets will start paying them faster than products that may be sitting in a warehouse.
What else on store shelves?
Beer. Mexico is a top exporter of beers thanks to the popularity of brands like Corona, Modelo and Dos Equis. The U.S. imported $3.2 billion worth of Mexican beer in 2017. Mexico also exported more than $1.3 billion in Tequila and other liquors.
Will this make my guacamole very expensive?
Avocados imported from Mexico have become a mainstay of the American diet. For example, of the 51 million pounds in the U.S. the week of May 19, almost 37 million were from Mexico, according to the most recent data from the marketing group Avocados from Mexico.
Phil Flynn, senior market analyst at the Price Futures Group in Chicago, said that while the proposed tariff would be 5%, shoppers would end up paying 10% more at stores and that at least at the beginning, California avocados could cover some of it.
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What does this mean for my summer picnic?
It depends what you serve. The U.S. also imports plenty of fresh fruits and vegetables besides avocados, such as cucumbers, berries, tomatoes, lemons and limes. Mexico exports a lot of tequila and beer to the U.S.
Phil Lempert, founder of supermarketguru.com, which tracks industry news and trends, says prices for all foods from Mexico could catapult to more than 20% higher.
“What we’re going to see happen is Mexico, as we’ve seen with China, will find other partners (to sell) produce to, beer to, tequila to,” he said. “What I think will happen is that resource for us will dry up. We’ll have scarcity, so prices will go much higher than 5%.”
How would the tariff affect my mall purchases?
It’s unclear which specific goods would see the biggest price hikes as retailers often shy away from sharing pricing strategies for specific items in advance. However, Mexico’s textile exports to the U.S. are sizable. Produce, appliances and electronics and clothiers could be affected heavily if the tariffs were to occur, according to Daniel Martins, the founder of DM Martins Research.
What would the effect be on the U.S. economy?
A 25% tariff would reduce economic growth next year by seven-tenths of a percentage point, says economist Greg Daco of Oxford Economics. It would mean 600,000 fewer jobs. And that doesn’t include the impact of the tariffs Mexico would impose on U.S. exports in retaliation.
Contributors: Edward C. Baig, Dalvin Brown and Zlati Meyer in New York: Nathan Bomey in Virginia; and Andrew Coolidge in Cincinnati.