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Thursday August 6th, 2020 6:43AM

Mexico growers, economists troubled by Trump tariff threats

By The Associated Press
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CULIACAN, Mexico (AP) — Tomato exporter Sergio Esquer Peiro spent much of Friday in hastily called meetings with other stunned growers, trying to evaluate the potential fallout of U.S. President Donald Trump's threat to slap coercive tariffs on all imports from Mexico.

Already he and others were having to contend with a 17.56% tariff on tomatoes imposed after Washington announced in March it was ending a longstanding agreement over alleged Mexican dumping of the fruit. If the new duties do take effect, Esquer is looking at another 5% being slapped on his products — potentially increasing to 25% in subsequent months — unless Mexico does more to stop illegal migration through its territory by a June 10 deadline per Trump's demand.

"Right now more than anything there is a reaction of disbelief with everything that is going on," Esquer, who's been sending tomatoes and other crops to the United States for 60 years, told The Associated Press by phone during a break in the meetings.

President Andrés Manuel López Obrador said Mexico won't panic over the proposed tariffs, and dispatched his top diplomat to Washington on Friday for talks seeking to head them off. But economists and those whose livelihoods depend on the deeply intertwined trade relationship worth hundreds of billions of dollars a year worry that stiff duties could have dramatic, negative consequences and potentially spark a trade war.

"It also goes against the spirit there is between both countries, the agreements we have, the bilateral trade we have, which is very successful," Esquer continued. "On the other hand, we'll have to wait for the reaction of U.S. exporters to Mexico, because they are also going to see their exports threatened if Mexico launches some kind of mirror policy."

From berries and automobiles to machinery and household appliances, all of Mexico's exports stand to be hit with the tariffs. Avocado growers in Michoacan, electronics factory workers in Tamaulipas, across the border from Texas, auto parts exporters, all would feel the pinch.

Esquero, who does business from the tomato-growing northwestern state of Sinaloa, said it's not just businessmen who stand to lose, since Mexico's estimated 700 tomato exporters are responsible for directly generating some 450,000 jobs. According to Mexico's Agriculture Department, last year some $2 billion in tomatoes were exported to the United States, second only to tequila and ahead of avocados.

The threat also throws into question the future of the USMCA trade deal between the U.S., Mexico and Canada, hammered out in months of contentious negotiations as a replacement for the North American Free Trade Agreement, one of the Trump administration's most touted achievements.

Trump's threat came the same day Mexico announced it would begin the process of ratifying the USMCA and less than two weeks after it successfully negotiated the lifting of U.S. steel and aluminum tariffs that had been a roadblock to final approval for the trade deal. It now throws final passage of the USMCA into doubt.

"It would really have a terrible impact on our producers and our exporters," said Kenneth Smith Ramos, who led then-President Enrique Peña Nieto's delegation to USMCA talks and is now an international trade consultant at Mexico City-based AGON.

"And it would hurt U.S. producers as well because they rely a lot on Mexican inputs for their production," he added. "So it would reduce their competitiveness and force them to raise prices, which would ultimately of course hit consumers."

That means people like Chuck Sholtis, CEO of El Paso, Texas-based Plastic Molding Technology Inc., which employs 100 people. Most of its business involves plastic injection molding for automotive, electronics and business products for maquiladoras, factories in Mexico that are run by foreign companies. Sholtis said his company has already suffered from U.S. steel tariffs on China that increased the costs of their tools, and it's also been hit by slowdowns at ports of entry this year prompted Trump administration concerns.

Sholtis said the United States has found a niche in high-tech specialized manufacturing that's part of a global supply chain. He fears that if more tariffs like this are implemented, or if the USMCA doesn't take effect, the United States will lose its edge in manufacturing. He's also worried about possible recession in Mexico and the United States.

"It's illogical," Sholtis said, "Tariffs go against one of the stated goals of the administration: to help manufacturing and thereby create high-skilled manufacturing jobs."

The economic impact for Mexico was swift, with the peso down more than 3% against the U.S. dollar Friday. U.S. stocks likewise tumbled on Wall Street.

Initial macroeconomic projections from economists were also chilling.

Analyst Alfredo Coutiño of Moody's Analytics said Mexican exports to the U.S. totaled $358 billion last year, or 80% of all goods the country sold overseas. Over the course of a year, he said, a 5% tariff would represent about $18 billion in damage or 1.5% of Mexico's GDP, while a 25% tariff would amount to $90 billion or 7.3% of GDP.

Banco Base estimated that a 5% tariff could knock 2.85 percentage points off growth of Mexico's exports, but said a weaker peso would help compensate.

Such tariffs would "likely push Mexico into a recession," as well as disrupt regional supply chains and hurt investor confidence, Oxford Economics economist Gregory Daco wrote in a report.

Coutiño said Mexico could impose retaliatory penalties, sparking a tariff war.

A second, "less aggressive but potentially more effective" option would be to allow the peso to depreciate to the point where the tariffs would be neutralized, he added.

Via Twitter, Trump argued that "Mexico has taken advantage of the United States for decades. Because of the Dems, our Immigration Laws are BAD. Mexico makes a FORTUNE from the U.S., have for decades, they can easily fix this problem. Time for them to finally do what must be done."

Mexico already has implemented policies and actions to discourage irregular migration.

Last month, it raided the latest caravan of mostly Central American migrants traveling through the southern state of Chiapas, arresting hundreds and effectively breaking it up. There have been no significant caravans since then, with many migrants saying they now fear to travel in large groups.

Mexico also has deported thousands of migrants and frustrated thousands more who wait endlessly for permits that would allow them to travel legally through the country.

But sealing its porous southern border with Guatemala is probably impossible because Mexico lacks sufficient infrastructure to completely patrol a frontier that includes a river passing through dense jungle.

"We are carrying out our responsibility in immigration policy," López Obrador said Friday morning, while making no promises of new action to stem the flow of mostly Central American immigrants transiting Mexico to reach the U.S. border.

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

López Obrador espouses a longer-term, holistic approach focused on improving security, development and economic opportunity in the migrants' countries of origin, especially Honduras, Guatemala and El Salvador.

For now López Obrador is betting on diplomacy and dialogue.

Foreign Relations Secretary Marcelo Ebrard announced talks would take place next Wednesday in Washington with him and U.S. Secretary of State Mike Pompeo leading their respective nations' delegations.

"There is a disposition for dialogue," Ebrard tweeted. "We will be firm and we will defend the dignity of Mexico."

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