US President Donald Trump, responding to a surge of illegal immigrants across the southern border, vowed on Thursday to impose a tariff on all goods coming from Mexico, starting at 5% and ratcheting much higher until the flow of people ceases.

Trump’s move dramatically escalates his battle to control a wave of tens of thousands of asylum seekers, including many Central American families fleeing poverty and violence, that has swelled alongside his promises to make it harder to get US refuge and his efforts to build a wall on the Mexican border.

The announcement rattled investors who feared that worsening trade friction could hurt the global economy. The Mexican peso, US stock index futures and Asian stock markets tumbled on the news, including the shares of Japanese automakers who ship cars from Mexico to the United States.

The president’s decision, announced on Twitter and in a subsequent statement, was a direct challenge to Mexican President Andres Manuel Lopez Obrador and took the Mexican government by surprise on a day when it had started a formal process to ratify a trade deal with the United States and Canada (USMCA).

It raised the risk of devastating economic relations with the biggest US trade partner for goods. Mexico, heavily dependent on cross-border trade, rose to that ranking as a result of Trump’s trade war with China.

The measures against Mexico open up a new front on trade and if implemented are bound to trigger retaliation that would hit heartland, Trump-supporting farming and industrial states.

Higher tariffs will start at 5% on June 10 and increase monthly up to 25% on Oct.1, unless Mexico takes immediate action, he said.

“If the illegal migration crisis is alleviated through effective actions taken by Mexico, to be determined in our sole discretion and judgement, the tariffs will be removed,” Trump said.

Lopez Obrador responded in a letter he posted on Twitter, calling Trump’s policy of America First “a fallacy” and accusing him of turning the United States into a “ghetto,” that stigmatised and mistreated migrants.

“President Trump, social problems are not resolved with taxes or coercive measures,” he wrote, adding that a delegation led by Foreign Minister Marcelo Ebrard would travel to Washington. He did not threaten to retaliate, saying he wanted to avoid confrontation.

Lopez Obrador pushed back against Trump’s assertion that Mexico let immigration happen through “passive cooperation,” saying: “you know we are fulfilling our responsibility to stop (migrants) moving through our country, as much as possible and without violating human rights.”

Determined to avoid a break down in Mexico’s most important bilateral relationship, since Trump threatened to close the world’s busiest land border over the migrant surge, Lopez Obrador’s government has drastically tightened controls on the movement of migrants, detaining and deporting thousands in recent months, while calling for US aid to tackle root causes.

“We’re in a good moment building a good relationship (with the United States) and this comes like a cold shower,” said Mexico’s deputy foreign minister for North America, Jesus Seade, who had been in Mexico’s Senate delivering the USMCA trade deal for ratification shortly before the news broke.

In Beijing, Chinese foreign ministry spokesman Geng Shuang expressed sympathy with Mexico.

“The United States has repeatedly taken trade bullying action. China is not the only victim,” Geng told reporters.

Despite Trump’s assertion that Mexico could easily end Central American immigration, its relatively small security forces, also struggling with a record level of gang violence and homicide, are having a hard time controlling the flows.

In the biggest migrant surge on the US-Mexican border in a decade, US officials say 80,000 people are being held in custody with an average of 4,500 mostly Central American migrants arriving daily, overwhelming the ability of border patrol officials to handle them.

A senior White House official said Trump was particularly concerned that US border agents apprehended a group of 1,036 migrants as they illegally crossed the border from Mexico on Wednesday. Officials said it was the largest single group since October. Before unveiling the tariff threat, Trump posted a video purporting to be of the crossing on his Twitter feed.

Reuters