Faced with increasing pressure to back down on tariffs threatened on goods imported from Mexico, President Trump made a deal involving tighter measures on immigration which led to the suspension of the 5% tariffs that were supposed to go into effect on Monday.
However, this reversal does not mean that US-Mexico trade risks have disappeared.
“We believe the link between immigration and trade policy cannot be reversed,” said Nomura economist Lewis Alexander. “The fact that immigration is an important political issue to President Trump means that the risk of some sort of disruption to economic transactions that span the border will remain at least through the 2020 elections.”
Fellow Nomura economist Aichi Amemiya says that American companies are bracing themselves given the high risk that tariffs on imports from Mexico could still happen.
“I think especially the car makers they are considering ways to reduce the potential impact from Mexican tariffs,” he said.
Bar set too high for Mexico?
US-Mexico trade developments remain a risk because they now depend on two key factors that are hard to predict according to Nomura.
The first risk being to what extent political and social developments in Central America will drive immigration. “We don’t know what’s going on in those countries. However…violence or… weather factors [impacting harvests] should affect the number of asylum seekers. We don’t know much about the domestic factors in those countries, but there’s huge uncertainty,” said Amemiya.
The second risk is the fact that it’s hard to predict the effectiveness of Mexico’s response in apprehending migrants crossing the border. During the month of May, there were a total of 144,278 apprehensions, according to the U.S. Customs and Border protection data. Nomura points out that both limits on the basic capacity of the Mexican state and the government’s own domestic assessment of its priorities could impair the effectiveness of their response.
“If Mexico fails to reduce the [number of] asylum seekers, the U.S, President Trump will likely reinstate Mexican tariffs,” says Amemiya.
Mexico vs. China tariffs
The fact that President Trump backed down on tariffs on imports from Mexico is not necessarily a positive sign for U.S.- China negotiations, either.
Amemiya points out that there has been a contrast between Congress and the business communities’ response to tariffs on China compared to their response to tariffs on Mexico. For instance, the U.S. Chamber of Commerce did not threaten to sue the White House over tariffs on goods from China, but it did however for tariffs on Mexico.
Similarly, Republican lawmakers have supported President Trump on the issue of tariffs on imports from China, but that support was threatened by tariffs on Mexico. Amemiya says that the difference in responses could embolden President Trump to escalate tariffs on China.
Nomura predicts that Trump’s threat of tariffs on an additional $300 billion worth of Chinese goods in an effort to extract more concessions from China, could become reality by September.
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