US tariffs on Mexican goods may raise recession risk significantly

NEW YORK — The possibility of the US economy plunging into recession would rise significantly if the United States materializes its threat to impose as much as 25 percent tariffs on imported goods from Mexico, leading US investment research firms say.

"A 25 percent tariff on Mexican goods as well would risk the US falling into recession," said a research note by Swiss investment bank UBS issued on Friday.

Supply chains with transnational companies would be at risk as two-thirds of US-Mexico trade are intra-company. If investment is canceled and employment is cut, the risk of a recession will increase significantly, said the report.

US President Donald Trump said on Thursday he would impose a 5-percent tariff on all imported Mexican goods beginning June 10 so as to pressure the country to halt undocumented migrants crossing the border and will gradually increase tariffs to as much as 25 percent until the problem is remedied.

This move will hinder US economic growth and would be even more damaging if the tariffs on Mexican goods reach 25 percent, said a report by Bank of America Merrill Lynch Global Research on Friday.

"This latest escalation of the trade war will add to the uncertainty that is already plaguing US companies and manufacturers," said Bank of America Merrill Lynch (BofAML).

The fall of long-term US Treasury bonds and inversion of bond yields between short-term and long-term bonds have stoked fears of an economic slowdown and even recession recently.

The adjusted yield curve of US short-term and long-term bonds inverted in November 2018 and has remained in negative territory since then, according to Michael Wilson, chief US equity strategist with Morgan Stanley.

The start of "shot clock" six months ago put the United States in a zone for recession watch, said Wilson recently in a research note.

Now, the US economy has 19.5 percent chance of a recession over the next 12 months, which is still below the 30-percent threshold proven to be indicative of a downturn, according to an updated analysis based on recession probability model of BofAML.

This further escalation of the trade war increases the likelihood that the Federal Reserve will have to cut rates to offset the pain from tariffs, said BofAML.

Still, the bank expects the Federal Reserve to respond to the trade war slowly and only after hard data weaken to avoid flip-flop of tariffs and not to encourage further escalation of the trade war.

If the Federal Reserve saw a downside risk to the US economic outlook, then that would be a factor that could call for a more accommodative policy, said Federal Reserve Board of Governors Vice Chair Richard Clarida on Thursday.

Statistics show that the Unites States, as the largest trading partner of Mexico, imported around 350 billion US dollars of goods from Mexico in 2018. Exports account for 38 percent of Mexico's gross domestic product (GDP) and nearly 80 percent of Mexico's exports are bound for the United States.