Economics: The toll of Trump’s threatened tariffs

MEXICO - Report 11 Jun 2019 by Mauricio Gonzalez and Francisco González

President Donald Trump announced late Friday that his plan to impose a 5% tariff on all goods of Mexican origin, increasing 5% each month until reaching 25% in October, had been averted. He claimed this was because his government had wrung major concessions from Mexican officials on efforts to clamp down on Central American immigrants trying to reach the US border and to accommodate a greater number of US asylum seekers on Mexican soil. Though the exact terms of that deal have not been made public, the White House has made clear that Trump is prepared to impose the punitive measures whenever he decides Mexico is not “fix[ing] the immigration issue.”

Although this is a positive outlook for Mexico, tariffs at a 5% level are still a real possibility in the near future. The agreement will be revised 45 days after the supposed date of the tariff imposition and with the 2020 U.S. presidential elections, it is likely that Trump will continue to pressure the Mexican government if it is unsure that Mexico can consistently fulfill its agreement regarding immigration into the United States.

Given his penchant for conjuring up such crises, especially as we approach the next US presidential election cycle, it is important to have a clear idea of just how such trade sanctions would affect Mexico, its public finances, currency, consumption trends, and both their direct and indirect impact on specific sectors and the economy in general. In our opinion many analysts have failed to grasp the potential effects of the tariffs in their true dimensions, tending to exaggerate them in some instances, underestimating them in others.

The sectors that stand to feel the greatest direct and indirect impacts are manufacturing, mining and primary activities. While many services might go unscathed, it should be noted that export-related commercialization and distribution services could be hard hit. The extent of damage to net export sectors would depend on the price elasticity of demand and the extent to which the peso might weaken, especially if the depreciation relative to the US dollar should prove to be permanent.

It is also necessary to stress the clearly adverse effect on public finance and social policy through diminished economic growth, reduced tax collections, and higher levels of unemployment. We are convinced there is an imperative need for the federal government to analyze these possible impacts in order to design the relevant responses at a time when its room for maneuver in managing public finance, curbing spending and raising taxes is highly curtailed. Ultimately, it would likely lead to an unforeseen expansion of the public deficit.

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