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Trump's Mexico Tariffs Could Start Another Trade War, Economists Warn

This round could be even more costly for U.S. agriculture and consumers.
Tomatoes are seen at a market in Mexico City, Mexico, on May 9th, 2019.

Tomatoes are seen at a market in Mexico City, Mexico, on May 9th, 2019.

President Donald Trump threatened on Thursday to impose tariffs on all Mexican goods as a way to force the country to end illegal immigration across the southern border. In a tweet, Trump announced that the United States will add a 5 percent tariff on the country's imports in June, adding that the tariff "will gradually increase until the Illegal Immigration problem is remedied."

The president's announcement has already disrupted U.S. markets and alarmed farmers and business owners, who are still paying the price of the president's first trade war. Now, experts predict another round could cost the economy billions of dollars and undo recent efforts to stabilize trade.

Here's what economists say these tariffs could mean for both producers and consumers of these goods.

Raising Costs for Consumers

Mexico is the U.S.'s third-largest trade partner. Experts say raising costs on imports will have a direct impact on the U.S. economy and consumers, and if Mexico retaliates as anticipated, it could decimate farmers who are already struggling.

Americans shopping for produce will be the first to feel the effects, according to Chad Hart, an agriculture economist at Iowa State University. The U.S. imported $26 billion in fruits, vegetables, and other foods from Mexico last year. Now, all of those will face a 5 percent tariff, which could escalate to as much as 25 percent if Mexico doesn't meet Trump's demands. "We'll likely see those prices ratchet up very quickly," Hart says. "Especially when we're talking about perishable products in a grocery store, there's not a lot of cushion in place to handle an additional 5 percent cost, so oftentimes that gets passed along to the consumer."

The tariffs could also raise prices for auto parts and construction materials, and industry groups that rely on these materials are not happy. Tariffs Hurt the Heartland, a national campaign representing more than 150 leaders in retail, tech, manufacturing, and agriculture, criticized the decision on Friday. "Forcing Americans to pay more for everything from avocados and beer to jeans and electronics as a means to address border security makes no sense," representatives said in a statement. "And using tariffs to address unrelated policy objectives sets a dangerous precedent while creating significant uncertainty for American employers who are living tweet-by-tweet while trying to plan their business."

Igniting the Next Trade War?

The real fear for U.S. agriculture lies in potential retaliation, which several economists expect will target even more products. Just last week, the two countries resolved a nearly yearlong trade dispute, with the U.S. agreeing to lift tariffs on steel and aluminum, and Mexico easing retaliatory tariffs on U.S. agriculture products. "This would seem to destroy all that forward momentum," Hart says.

If anything, he says, this round will be worse: "You can argue this is a much larger deal. With steel and aluminum, it was two specific products. We're talking about tariffs on everything."

Based on Mexico's reaction last year, farmers expect their goods will once again be on the line. "This is very concerning from the viewpoint of U.S. agriculture," says Michael Nepveux, an economist with the American Farm Bureau Federation. "I can't stress enough how big a deal it was to have the [steel and aluminum] tariffs removed. Nearly a week later, this is again in jeopardy."

Mexico is a top export market for U.S. pork, dairy, corn, and soybeans, some of which already took a hit in the trade war with China. Already, Trump's tariffs have resulted in the lowest U.S. agricultural exports in three years, according to the Food & Environment Reporting Network's analysis of U.S. Department of Agriculture forecasts. "Farmers have been fighting this fight for the last year," Nepveux says. "Agriculture has always been the tip of the spear when it comes to these trade disputes. This is just another challenge going forward."

Flooding in the Midwest has set back planting seasons to an extent that Nepveux calls "astronomical." Meanwhile, producers who rely on undocumented and legal immigrants have experienced a labor shortage under Trump, whose anti-immigration policies often run counter to the needs of the U.S. food system.

The announcement could also jeopardize a key piece of Trump's agenda: the United States-Mexico-Canada Agreement, which has not yet been ratified. The deal would replace the North American Free Trade Agreement and has been generally well-received among agriculture and trade groups.

CBS reported Friday that Representative Collin Peterson (D–Minnesota), chairman of the House Committee on Agriculture, said the new tariffs on Mexico would make it "virtually impossible" to ratify the new agreement. When asked about how tariffs might affect these negotiations on Friday, Vice President Mike Pence said the USMCA was "simply an idea whose time has come."

On top of the political consequences, the president's strategy has also prompted legal questions. "Trump is using trade policy to try to impact migration policy in another country," Hart says.

While this is not unprecedented, Hart says that the two do not have a direct relationship—and Trump's decision to use one to affect the other could have a lasting impact: "He's basically ... using trade as a lever to help put political pressure on Mexico to make changes to their internal policy. It's an approach that definitely creates some challenging precedents."