How tariffs on Mexican imports could affect what you pay for vegetables and cars
President Trump's 'America First' approach has relied on slapping tariffs on countries, such as China and Mexico, which have led to current trade wars. What is a tariff and how do they work? We explain. USA TODAY
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 Donald 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 Oct. 1 if Mexico doesn’t take steps “to dramatically reduce or eliminate” the number of migrants, Trump said 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.
After the first 5% tariff in June, tariffs would increase by 5 percentage points each month before reaching 25% on Oct. 1
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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 order the tariffs removed 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 on to shoppers, Bergsten figures, increasing costs by up $86 billion across the economy. The Trade Partnership, a research group, thinks the overall total of tariffs will be less simply because U.S. retailers and manufacturers will buy less product from Mexico because of the duties.
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 car buyers 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 average price increase 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 could shoppers 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.
Supermarkets may try to mitigate higher Mexican imports by buying some imports from other countries – but that’s harder to do for some categories: Almost 95% of imported strawberries come from Mexico. Supermarkets may also try to blunt the higher costs of some items by raising prices of higher-volume staples that are less affected. So even though 7% of banana imports come from Mexico, a grocer might raise those prices slightly to keep from raising avocado prices (almost 90% of imports from Mexico) too sharply.
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.
Would 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 came 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 is 5%, shoppers would end up paying 10% more at stores and, at least at the beginning, California avocados could cover some of it.
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What would this mean for my summer picnic?
It depends on what you serve. The U.S. imports plenty of fresh fruits and vegetables besides avocados, including cucumbers, berries, tomatoes, lemons and limes.
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 about electronics?
“A lot of parts come out of China but a lot of production and assembly go on at the Mexican border,” says Sage Chandler, vice president for international trade policy at the Consumer Technology Association.
Top consumer tech imports include desktop PCs and servers ($24.3 billion in 2018), TVs, ($8 billion) and refrigerators and freezers ($3.8 billion), the CTA says.
Chandler says there’s a lot of confusion coming out of the White House. Would tariffs apply to products made in Mexico that come into the U.S. or anything that ships from Mexico regardless of its country of origin? And some tariffs could be applied, she says, on multiple occasions, as products or parts move back and forth across the border.
Consumers are price sensitive when it comes to tech products, and consumer electronics companies could even cancel planned back-to-school promotions or deals tied to Amazon Prime Day, says Bernie Thompson, CEO of Plugable, a leading developer of docking stations and other computer peripherals.
How would tariffs affect mall purchases?
It's unclear which 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. Throw in that and proposed tariffs on another $300 billion in Chinese imports later this year and the spreading trade war could tip the country into recession.
Why did Trump take this dramatic step?
Besides pressuring Mexico on illegal immigration, Goldman Sachs says Trump hopes the gambit prods Congress into finally passing the United States-Mexico-Canada Agreement, known as the new NAFTA. The administration earlier Thursday submitted the text of the deal to Congress, launching a process for lawmakers to vote on it.
Could the strategy work?
Bergsten says it could work by forcing Mexico to take more aggressive steps to curb immigration. After all, exports to the U.S. make up about 30% of the Mexican economy, according to Oxford, and 25% tariffs are likely to topple that country into recession. It’s not clear, though, how well Mexico will respond to such a brass-knuckled approach, Bergsten says. Meanwhile, U.S. lawmakers have indicated the tariffs will only make them less likely to pass USMCA.
“It’s very risky,” Bergsten says. “It could blow up the whole” trade agreement while burdening Americans with higher prices.
How about stocks?
The Dow Jones industrial average fell 354 points Friday, or 1.4%, as investors blindsided by the tariffs worried they could undercut the trade deal or even lead to a recession.
Will Mexico retaliate?
Mexican officials said they will respond strongly. So expect tariffs on virtually all U.S. goods exported to Mexico if the U.S. hits Mexico with a 25% duty. U.S. exports to Mexico totaled $265 billion last year. Among the leading products are machinery, cars and plastics. Mexico is the nation’s second-largest market for agricultural products, especially corn, soybeans, dairy and pork. That would compound the struggles of American manufacturers and farmers already hobbled by China’s tariffs.
Contributing: Edward C. Baig, Dalvin Brown and Zlati Meyer in New York: Nathan Bomey in Virginia; and Alexander Coolidge in Cincinnati.