U.S. President Donald Trump rekindled the North American trade war on Thursday with the threat of sweeping tariffs on Mexican imports, rattling global financial markets and casting doubt on the effort to ratify the continental free-trade agreement.
Frustrated with a surge of migrants at the border, Mr. Trump announced, first via Twitter, a 5-per-cent tariff on all Mexican goods effective June 10, which could escalate to 25 per cent by October “if the crisis persists.”
The latest trade salvo comes less than two weeks after the United States lifted aluminum and steel tariffs on Mexico and Canada in what seemed like a push to expedite approval of the renegotiated North American free-trade agreement.
“Just as governments seemed to be making progress, we get this,” said Royal Bank of Canada senior economist Nathan Janzen. “It’s hard to imagine Mexico ratifying a deal if these tariffs are put in place. And you need all three parties on board.”
In a letter to Mr. Trump, Mexican President Andres Manuel Lopez Obrador appealed for a dialogue to address the immigration issue without resorting to tariffs. “Social problems are not resolved by taxes or coercive measures,” he wrote.
The resumption of trade hostilities poses a threat to all three economies, as the toll from the global trade war becomes increasingly apparent in economic readings and market sentiment.
Stock markets around the world took a hit in Friday’s trading, with the S&P/TSX Composite Index declining by 0.3 per cent, and the S&P 500 dropping by 1.3 per cent.
That capped off four consecutive weekly losses for the main U.S. index, as the potential for competing tariffs to imperil the global economy struck at overall investor confidence.
“The equity market is sending a message to the White House about what it thinks about the move to impose tariffs on Mexico,” CIBC chief economist Avery Shenfeld said in a research note. “In a shaky global business climate, these added uncertainties are a clear and present danger to global growth and confidence.”
The value of Mexican goods crossing the U.S. border last year totalled US$347-billion, meaning a 5-per-cent tariff would amount to an import tax of US$17-billion. At 25 per cent, that figure rises to US$87-billion.
“Many of the goods coming into the U.S. from that country are the product of American companies operating there,” Mr. Shenfeld wrote.
The United States has already put tariffs on US$250-billion of Chinese imports, while Mr. Trump has publicly mused about imposing tariffs on European vehicles. Most of those costs are ultimately paid by U.S. businesses and consumers.
“The U.S. industrial sector has borne the brunt of those tariff hikes,” Mr. Janzen said. The country’s manufacturing output declined in three of this year’s first four months, as global trade flows have slowed.
And since North American industrial production is so integrated across borders, the effects of a decline in U.S. manufacturing inevitably spill over into the Canadian economy.
Despite strength in Canada’s domestic economy and job market, trade proved to be a major drag on output in the first quarter, according to numbers released by Statistics Canada on Friday. Real GDP expanded at an annualized pace of just 0.4 per cent in the first three months of the year.
“Trade inflicted serious damage to the economy in the first quarter as exports slumped and imports soared,” Krishen Rangasamy, senior economist at National Bank of Canada, said in a note.
No industry sprawls across North American borders more than auto production, as components move back and forth among countries before a vehicle’s assembly is complete.
“Given that 40 per cent of the value of every Mexican-made vehicle exported to the United States is U.S. content, this is going to have a major impact throughout North America, including Canada, because the supply chains are truly integrated,” said Eric Miller, a Washington-based trade adviser.
The prospect of tariffs comes as vehicle sales in Canada and the United States are declining, and manufacturers are slashing costs to remain competitive.
Mr. Miller predicted U.S. and Canadian companies would look for suppliers outside Mexico to avoid the tariffs, but noted supply contracts are usually long term and not easy to rip up. Nor is it simple to find new suppliers.
“It means the price of vehicles is going to go up,” Mr. Miller said. “That’s only going to hurt the sales of vehicles even more.”
Canadian auto parts suppliers were among the biggest losers on the Toronto Stock Exchange on Friday, as shares in Magna International Inc., Linamar Corp., and Martinrea International Inc., declined by between 2.5 per cent and 4 per cent.
BRP Inc., the maker of Ski-Doo snowmobiles and other vehicles, saw its shares decline by 3 per cent.
BRP makes all of its Can-Am brand off-road vehicles in Mexico, in addition to other products. The company estimates the value of its trade flows across the U.S.-Mexico border at about $1.7-billion a year, according to research by National Bank of Canada.
“Implementation of these tariffs would be material for the company,” National Bank analyst Cameron Doerksen said in a note.
The stock market’s apparent disapproval of tariffs should carry some weight with the Trump administration, Mr. Shenfeld said.
“Our forecasts assume that this message resonates enough for the U.S. government to get back to the table with China, and now with Mexico, before the full damage is done,” he said.
“But we, like the market, are even less sure of that today than yesterday.”