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Trump's Mexico tariff threat worries US farmers already pummeled by China trade war

Key Points
  • President Donald Trump's threatened 5% tariff on all Mexican imports could hit American farmers especially hard if Mexico retaliates with punitive duties on U.S. agricultural products.
  • "Producers are extremely concerned about another potential trade retaliation from Mexico," said National Pork Producers Council President David Herring.
  • Mexico is considered one of the most lucrative markets for American agriculture products given its easy access and close proximity to the U.S, whether via rail, ship or truck.
A farmer fills seed boxes on a Case IH Agricultural Equipment planter while planting corn in Princeton, Illinois, April 24, 2018.
Daniel Acker | Bloomberg | Getty Images

President Donald Trump's threatened 5% tariff on all Mexican imports could hit American farmers especially hard if Mexico retaliates with punitive duties on U.S. agricultural products. Farmers are already reeling from Trump's drawn out trade war with China and fear further losses could be in their futures.

"When you look at all the different products that the U.S. exports to Mexico, all those folks are getting nervous that retaliatory tariffs could certainly find their way onto their products," said Veronica Nigh, an economist with the American Farm Bureau Federation, the nation's largest farm sector organization.

Mexico is considered one of the most lucrative markets for American agriculture products given its easy access and close proximity to the U.S, whether via rail, ship or truck. Even so, that hasn't stopped other countries from chipping away at American agricultural dominance when it comes to supplying its neighbor to the south with grains, meats and other farm products.

The U.S. exported $19 billion in agricultural exports to Mexico last year, making it the second-largest purchaser after Canada, according to the U.S. Department of Agriculture. Mexico is the top market for U.S. corn, rice, dairy products, poultry, eggs, pecans and also a major buyer of American beef, pork, soybeans and wheat.

Farmer walks through his soy fields in Harvard, Illinois.
Nova Safo | AFP | Getty Images

Frustrated with Central American migration, the White House last Thursday announced the U.S. plans to slap 5% tariffs on Mexican goods, including cars, beer, tequila, as well as fruits and vegetables. The duties would start June 10 and gradually increase to 25% on Oct. 1 unless Mexico "substantially stops the illegal inflow of aliens coming through its territory."

"If you put a tariff on imported goods, usually that price gets passed to consumers," said Luis Ribera, an agricultural economist at Texas A&M University. "And you can expect that Mexico will retaliate one way or another."

Mexican officials in Washington this week as part of a diplomatic push to avert new tariffs are warning the levies won't stop the flow of migrants. Talks between U.S. and Mexican officials on Wednesday failed to produce a deal, a senior administration official told NBC News.

Trump slapped tariffs last year on imported steel and aluminum, resulting in Mexico imposing levies on $3 billion of U.S. goods, including a variety of agricultural products. The U.S. last month lifted metals tariffs against Mexico and Canada as part of a push to get ratification of the pending United States-Mexico-Canada Agreement.

However, Trump's threat to impose new tariffs against Mexico over immigration puts USMCA in jeopardy and raises the risk of additional financial fallout for American farmers already hurting from the escalating trade war with China. The new USMCA is designed to replace the North American Free Trade Agreement, a 25-year-old pact between the U.S., Canada and Mexico.

"Amid a perfect storm of challenges in farm country, we cannot afford the uncertainty this action would bring."
Lynn Chrisp
president, National Corn Growers Associatiop

"Producers are extremely concerned about another potential trade retaliation from Mexico," said National Pork Producers Council President David Herring, a pork producer from North Carolina. "We just got away from the 20% punitive tariffs just a few weeks ago."

Under NAFTA, the U.S. has enjoyed decades of zero-tariff pork trade with Mexico but the retaliatory levies imposed last year after the metals duties cost the American pork industry about $1.5 billion last year, according to Herring.

"Mexico is our top trade partner as far as U.S. pork by volume," said Herring, adding that the industry exports about 30% of its product to Mexico.

But Mexico could boost pork imports from other suppliers, including Canada, Chile and European Union. The tariffs Mexico imposed last year on U.S. pork resulted in Canada increasing its shipments by about 20%.

Other global suppliers of pork to Mexico already have taken share away from the U.S. in the past year and American executives concede the only reason more isn't being lost is because the industry has accepted lower prices. The U.S. industry also has lost significant share in China due to the trade war and increased pork exports from Spain and other global suppliers.

As for corn, about one fourth of U.S. exports go to Mexico and grain producers are concerned Trump's threat of new tariffs on Mexican imports to stop illegal immigration will backfire.

"Amid a perfect storm of challenges in farm country, we cannot afford the uncertainty this action would bring," said Nebraska farmer Lynn Chrisp, president of the National Corn Growers Association. Also, he said the recent deal to lift steel tariffs on Mexico was an important breakthrough for USCMA but new tariffs threaten to reverse that progress.

U.S. corn exports totaled $3 billion last year, up about 16% from 2017 levels, and in the first quarter jumped by 35%, according to USDA.

But Mexican grain buyers have been looking more to South American suppliers recently, particularly Brazil, amid concerns about the outlook for the U.S. crop, an industry source told CNBC this week.

Wet weather and flooding in sections of Midwest and northern Plains could cut corn and soybean yields. Given crop concerns, the July corn futures contract in Chicago is up about 18% since early May.

At the same time, a retaliatory tariff from Mexico also could further dampen demand for U.S. corn.

"The U.S. has the benefit of being right next door and so those shipping costs of getting corn to Mexico is certainly is less expensive than shipping corn from Brazil or Argentina to Mexico," said Nigh. "But at some tariff level, the tariff offsets that transportation benefit that we've got."