Economists see President Donald Trump’s tariffs on Mexican goods denting growth and adding to headwinds that will prompt both countries’ central banks to cut interest rates in the next year.
A slight majority of 27 analysts expect levies on Mexico imports to reach a maximum of 5% or 10%, according to a Bloomberg News survey conducted from Friday to Monday. Most respondents see the fees as short-lived, with 60% saying they’ll be lifted by the end of September.
But some economists see a more protracted trade war, as a handful expect the full 25% levies to be imposed, with about a quarter of respondents saying the tariffs will remain in place until at least 2020.
“Even a 5% tariff is going to make goods not competitive,” said Thomas Fullerton, an economics professor at the University of Texas at El Paso and one of the survey respondents. If the full 25% tariffs take effect, it “would likely cause a number of companies to face such severe increases in the cost of production that it could cause business bankruptcies and closures,” he said.
In addition, there would be “a number of payroll cutbacks throughout manufacturing, unemployment would go up substantially, and the U.S. could easily peter into a recession under those circumstances.”
Trump last Thursday threatened to impose 5% tariffs on all Mexican goods beginning June 10, escalating to as high as 25% by October unless Mexico stopped immigrants from entering the U.S. illegally. The warning led several economists to forecast an increased risk of a recession in the world’s largest economy and predict it would weigh on growth since trade between the two countries is so highly integrated.
The tariffs would compound the effects already filtering through the economy from the levies on Chinese imports over the past year, with Trump recently threatening to expand the list of targeted goods. U.S. growth was already poised to slow to about 2.6% this year and further slide to 1.9% in 2020, according to economists surveyed in early May.
Some parts of the economy are already showing cracks, such as the manufacturing sector where a gauge of activity fell in May to the lowest level since 2016.
According to the Bloomberg survey, economists broadly agree that the tariffs would be detrimental to growth: If the full 25% rate is applied on Mexican imports, and the country retaliates, U.S. expansion will take a 0.5 percentage-point hit in 2020, according to the median estimate, while Mexico’s growth rate would decline a full 1 point next year.
Sustained levies would also mean a net loss of at least 50,000 U.S. jobs, according to about half the survey respondents, contrary to Trump’s assertion that the tariffs will “produce a massive return of jobs back to American cities and towns.”
Asked what the nations’ central banks would do in the next 12 months given what’s currently known about the tariffs, about half expect the Federal Reserve and its counterpart in Mexico to cut interest rates, while smaller shares see no change in borrowing costs.
Fed officials have been taking a patient approach to interest-rate policy as they confront contradicting signals in the economy: A steady labor market and higher wage growth are supporting consumer spending, while slowing corporate investment amid global weakness and the trade war of China are dragging down gross domestic product. Futures markets are now pricing in a rate cut as soon as July.
St. Louis Fed President James Bullard on Monday became the first policy maker this year to publicly suggest the need for a rate cut, saying such a move may be warranted soon to prop up inflation and counter downside economic risks from an escalating trade war.