Threat of U.S. tariffs on Mexico roils markets, dims hopes for new NAFTA

Stocks fell sharply and hopes for swift passage of a new NAFTA deal dimmed after U.S. President Donald Trump announced new tariffs that will apply to all imports from Mexico, starting June 10. 

In tweets overnight, Trump said he is slapping a five per cent tariff on all Mexican imports until it does more to block the surge of Central American migrants trying to cross the U.S. border.

Unless Mexico can stop the flow of migrants, which would necessitate either closing its own southern border or negotiating with each of the troubled states they come from, the president is promising the tariffs will rise five percentage points each month and could be 25 per cent by Oct. 1.

U.S. imports from Mexico totalled $346.5 billion US in 2018, up 10.3 per cent from 2017 and range from avocados to auto parts.

The tariff would apply every time a part or final product passes across the U.S.-Mexico border and is seen as very negative for trade and jobs, while raising prices for American consumers.

In a tweet Friday, Trump said that if he imposes tariffs on Mexico, companies will leave that country to avoid paying them and relocate to the U.S.

"In order not to pay tariffs, if they start rising, companies will leave Mexico, which has taken 30 per cent of our auto Industry, and come back home to the U.S.A.," Trump wrote.

But business was unhappy with the development, warning the tariffs would have devastating consequences on manufacturers and consumers. 

"Imposing tariffs on goods from Mexico is exactly the wrong move," said Neil Bradley, executive vice-president of the U.S. Chamber of Commerce, which is exploring legal action in response to the tariffs. "These tariffs will be paid by American families and businesses without doing a thing to solve the very real problems at the border. Instead, Congress and the president need to work together to address the serious problems at the border."

Auto sector hit hard

Carmakers, which could be especially vulnerable to business disruptions from the tariffs, took big losses in early trading Friday. General Motors, which imports more vehicles into the U.S. than any other U.S. automaker, tumbled more than four per cent Friday. Ford was down three per cent.

Technology and financial sector stocks also slumped.

In New York, the Dow declined 354 points to 24,804 by the close and the broader S&P index fell 36 points to 2,751. This is the first losing month this year for U.S. stocks, with the Dow down 5.7 per cent on the month and S&P off 5.6 per cent.

Toronto stocks followed the U.S. down, with the TSX closing down 63 points to 16,025, mainly on a hit to the oil sector. The TSX is off 2.3 per cent this month, after rising steadily since the beginning of the year.

Because Mexico is an oil exporter and its heavy oil is refined at Gulf Coast refineries, oil prices fell worldwide. There was fear that with the new NAFTA in jeopardy and the trade war with China ongoing, global demand would slow.

West Texas Intermediate, the benchmark North American contract, was down $3.30 US or 5.8 per cent to $53.30 US. Western Canada Select, a Canadian crude contract, fell $2.67 cents to $36.77 US a barrel, its lowest price since January. 

Loonie, peso fall

The Mexican peso fell by about 2.6 per cent against the U.S. dollar and the loonie sank below 74 cents US.

Mexico's Banco Base warned the tariffs could knock 2.85 percentage points off Mexico's exports. About 80 per cent of its exports go to the United States.

Chris Krueger, of Cowen Washington Research Group, speculated the new trade turmoil would leave any new Canada-U.S.-Mexico Agreement (CUSMA) dead in the water.

"Trump unveiled a one-two punch that we believe will make [CUSMA] extremely hard to pass in both Mexico and the U.S. Our base case yesterday was that [the deal] would be ratified into law by the end of the year — we do not see a path for that now," he wrote in a note to clients.

The second punch, after the tariffs, was the notification that the White House would push ahead to submit the new trade deal for approval, undermining delicate negotiations with House Democrats.

Mexico has already made its objections to the tariffs known and signalled it may retaliate.

Mexico reacts

Jesus Seade, the trade negotiator for Mexican President Andrés Manuel López Obrador, said Thursday in a news conference that if the tariffs come to pass, "we should respond in a forceful way." But he said right now that it is important to find out whether these tariffs are "really on the table."

He said if Trump is serious, the move is bad for "two countries that are trying to arrive at a marvellous free trade treaty, the best in history, according to President Trump."

Canada's Foreign Affairs Minister Chrystia Freeland expressed confidence that Mexico would go ahead with ratifying the treaty, which is before its parliament.

"The Mexican president has said today, speaking for Mexico, that Mexico intends to move ahead with its ratification process," she said.

López Obrador announced Friday he was sending his foreign minister to Washington, D.C., to negotiate with U.S. officials ahead of the June 10 deadline set by Trump.

He said he wants to avoid confrontation with the U.S., but that Mexico is doing all it can to curtail illegal immigration. He pointed out most of the migrants are not Mexican, but from Honduras and Guatemala.

"We have to help so that they don't enter the United States illegally, but we also have to do it respecting human rights," López Obrador said. "Nothing authoritarian. They're human beings."

In the meantime, investors are fleeing the risk, says Derek Holt of Scotiabank Economics.

"When trade negotiations and deals prove to be worthless because the U.S. signature has been debased, then the only fair assumption is to brace for soured trade and investment prospects across the global economy, including in the U.S." he said, describing the mood in the markets.

"In this scenario, China, America's NAFTA partners, Europe and Japan all balk at even attempting negotiation with this U.S. administration and we wind up in a protracted stalemate that severely damages confidence."

A competing theory among investors is that the fear is overblown and that Congress will rein Trump in before he does serious damage to trade and the markets, he said.