Tariffs or Tactics?

What’s Happening: President-elect Donald Trump has talked about raising higher tariffs throughout his campaign with the intention of bringing back manufacturing jobs, creating a reciprocal trade environment – and, in at least one case, creating political leverage. Most recently, Trump stated that he would immediately place a 25-percent tariff on Mexico if it does not assist the United States in addressing illegal immigration at the U.S. southern border. He followed this up by promising that he would raise tariffs to 50, 75, or 100 percent if Mexico does not address the illegal immigration crisis.

Why It Matters: Mexico was the largest trading partner of the United States in 2023 and is part of the United States-Mexico-Canada Agreement, which replaced the previous North American Free Trade Agreement. Mexico accounts for approximately 16 percent of U.S. imports and receives 16 percent of U.S. exports. Of Mexican imports, about 18 percent can be classified as either vehicles or inputs for car manufacturing and 9 percent are computer or television electronics. The vehicle imports make up over 20 percent of total U.S. car imports and 34 percent of total U.S. computer imports. If Trump implements a 25-percent tariff immediately upon taking office, U.S. consumers would have to pay about $100 billion more every year, or between $850 and $900 more per household, per year. (The total tariff costs would depend on how quickly consumers and businesses are able to find substitutes).

Looking Ahead: This is not the first time Trump has threatened to impose tariffs on Mexico to achieve a political objective. In May 2019, President Trump stated that his administration would increase tariffs on all Mexican imports by 5 percent every month, up to 25 percent, with the goal of forcing the Mexican government to cooperate on border security measures and to have Mexico stem the flow of illegal immigrants coming to the U.S. southern border. Mexico responded the next day by pledging to resolve the issue and the two countries later worked out an agreement whereby Mexico would deploy national guard troops to its southern border with Guatemala. This episode may provide insight into whether the incoming administration will play another game of tariff chicken with the largest U.S. trading partner. What is unclear is if President-elect Trump will place tariffs on Mexican goods regardless of whether a deal is reached on immigration, or if his proposal simply reflects a high starting point used as leverage to mitigate migrant crossings. What is clear is that Trump’s proposed tariff on Mexican vehicles or an across-the-board tariff would cause significant harm to American consumers.

Data last pulled on October 29.