Tariffs on Mexico could do wide-ranging harm to the U.S. economy, observers warn

Experts say consumers could be hurt by tariffs, and investor confidence and financial markets may also suffer

Brand new Subaru cars sit in a lot at Auto Warehousing Company near the Port of Richmond on May 17, 2019 in Richmond, California. U.S. President Donald Trump says he will hold off on applying new tariffs on cars and auto parts for up to six months as negotiations on trade deals continue with Japan and the European Union. Tariffs could do wide-ranging harm to the U.S. economy, business representatives and think-tank observers warn. (Justin Sullivan/Getty Images)

President Donald Trump’s threat to impose a new tariff on all imports from Mexico beginning Monday and to then ratchet them up each month unless Mexico does more to stop migration to the U.S. border could do wide-ranging harm to the U.S. economy, business representatives and think-tank observers said.

The business officials and others said the tariffs would hurt consumers, businesses, and possibly investor confidence and financial markets, the U.S. economy as a whole and the global economy. Trump announced his plan last Thursday and Mexican officials are in Washington this week hoping to find a solution.

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The president threatened to start with a 5 percent tariff June 10 and steadily increase it to as high as 25 percent Oct. 1.

Kristin Dziczek, a vice president and researcher at the Center for Automotive Research in Ann Arbor, Mich., estimated a 5 percent tariff would add $250 to the cost of a U.S.-built car, rising to $1,100 if the 25 percent levy would come to pass.

Dziczek said the CAR estimate is conservative because it assumes that each component passes through the border once and pays the tariff once. In reality, some parts go back and forth multiple times as they are worked into larger sub-component systems. The car industry in North America has become deeply integrated under trade agreements between the U.S., Mexico and Canada.

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Dziczek said producers have no reasonable way to avoid the tariffs in the short term.

“You can’t move your supply chain in 10 days,” Dziczek said.

The center estimates a 5 percent tariff could shave $7 billion from GDP and cost 82,000 jobs, with the cost escalating to $35 billion and 390,000 jobs for a levy of 25 percent, she said.

Nissan and General Motors are the biggest importers of cars from Mexico, Dziczeck said, but most of the manufacturers have a significant amount of production there. German manufacturers that get more parts from a Europe-based supply chain could be impacted less, she said.

“It’s not good for anybody,” she said. “Some are hit harder than others, but no one escapes this.”

Federal Reserve Chairman Jerome Powell on Tuesday also called attention to the central bank’s concern, saying in a speech in Chicago that he’d “like first to say a word about recent developments involving trade negotiations and other matters.” Powell said the Fed is monitoring the implications for the U.S. economic outlook. “As always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”

Among the questions is whether Trump will follow through on his threat. He may be emboldened by jobs data that has shown employers continuing to hire workers even as he levied tariffs on imported steel and aluminum and on goods coming from China.

Trump picked this fight as his administration is trying to get the United States-Mexico-Canada trade agreement, a pact to replace the North American Free Trade Agreement through Congress. The sudden announcement of tariffs on one of the three countries involved raised eyebrows on and off the Hill.

“You’re really playing with fire going down this route,” said Desmond Lachman, a resident fellow at the American Enterprise Institute. “It really sends a very bad signal that the United States doesn’t respect international norms.”

Lachman, a former IMF official, said the global economy already faces major risks, including the potential for a hard U.K. departure from the European Union if the two sides can’t find a better resolution and a financial crisis in Italy. U.S. policy is adding to the uncertainty, he said

“It could have consequences that go way beyond Mexico,” Lachman said.

Jay Timmons, head of the National Association of Manufacturers, expressed sympathy for Trump’s frustration with “our broken immigration system.”

“But intertwining difficult trade, tariff and immigration issues creates a Molotov cocktail of policy,” Timmons said in a statement. “Manufacturing workers should not be forced to suffer because of D.C.’s failure to act.”

The U.S. Chamber of Commerce, which also opposes the tariffs, compiled an estimate of the hit to U.S. business and consumers of the tariff increase, ranging from an annual burden of $17 billion at 5 percent, increasing to more than $86 billion if the tariff reaches 25 percent.

Neil Bradley, vice president and chief policy officer at the chamber, also pointed to the possibility of a broader impact. The opportunity for the U.S. to negotiate favorable trade agreements will decline if trading partners believe that a successful tariff negotiation could give way later to tariffs driven solely by political difference, he said.

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