By Sarah Morland and Brendan O'Boyle
MEXICO CITY (Reuters) -Mexican President Claudia Sheinbaum on Tuesday warned U.S. President-elect Donald Trump of dire economic consequences for both countries from tariffs and suggested possible retaliation following his threat of across-the-board tariffs of 25% on Mexico and Canada.
"One tariff will follow another in response and so on, until we put our common businesses at risk," Sheinbaum said in a letter to Trump, which she read aloud in a press conference, warning that tariffs would cause inflation and job losses in both countries.
Sheinbaum added she would also seek a call with Trump and send a letter to Canadian Prime Minister Justin Trudeau.
Trump, who takes office on Jan. 20, said late on Monday he would impose a 25% tariff on imports from Canada and Mexico until they clamped down on drugs, particularly fentanyl, and migrants crossing the border.
Mexico is the United States' top trade partner as of September, representing 15.8% of total trade, followed by Canada at 13.9%. The U.S. is also Mexico's top trade partner.
"What sense is there?" in escalating cross-border tariffs, Sheinbaum added, underscoring that they would hit particularly hard U.S. carmakers with plants in Mexico, such as General Motors (NYSE:GM) and Ford (NYSE:F).
Mexico's automotive industry is the country's most important manufacturing sector, accounting for over 35% of manufactured exports by value. The United States is by far the dominant destination for vehicles made in Mexico, with up to 79% of them heading north across the border.
Mexico represents nearly 25% of all North American vehicle production.
Tariffs could violate the United States-Mexico-Canada Agreement, a trade deal the countries signed in 2020 during Trump's first administration.
Sheinbaum said her administration had shown Mexico's willingness to help fight the fentanyl epidemic in the U.S., that apprehensions of migrants at the border were down, and that migrant caravans were no longer arriving at the U.S.-Mexico border.
However, Sheinbaum noted that criminal groups in Mexico were still receiving guns from the U.S.
"We do not produce weapons, we do not consume synthetic drugs. Unfortunately what we do have is the people who are being killed by the crime that is responding to the demand in your country," she said.
"Tariffs are a tax and would hurt both countries. We will find a solution," said Mexican Economy Minister Marcelo Ebrard, who earlier this month warned Mexico could retaliate with its own tariffs on U.S. imports if the incoming Trump administration imposes tariffs on Mexican exports.
His deputy, Luis Rosendo Gutierrez, said that the tariff threats from Trump were in line with the president-elect's behavior in his first term.
"It's his way of doing things," Gutierrez said in an interview with Radio Formula station. "First, he takes a really strong position, but then he sits down to negotiate. If he had just wanted to hike (tariffs), he would have done it on (Jan.) 20, he wouldn't have let us know in advance."
Financial analysts, meanwhile, reacted to Trump's announcement with commentaries ranging from pessimism to cynicism.
At CIBanco, analysts said they believed the threat was a tactic to force Mexico, Canada and China into talks, and as these measures would also damage the U.S. economy, the final result was likely to be less severe.
The Mexican peso weakened some 2% on Tuesday, aggravating a steep six-month decline.
Capital Economics economist Giulia Bellicoso said tariffs would likely hit Mexican equities by denting optimism about nearshoring - a trend of multinational firms setting up production facilities in Mexico - and curtailing investment.
"We expect Trump to start another trade war," she said.
Sheinbaum said she was confident Mexico would reach an agreement with Trump but that should the U.S. impose tariffs, Mexico had a plan to bolster its other trade relationships.
"We are not only looking to the north, but also to the south and to the European continent," she said. "Mexico is strong and we will always come out on top."