MEXICO CITY (Reuters) - U.S. President Donald Trump’s threats to slap punitive tariffs on all Mexican trade if Mexico does not stop illegal immigration has punched a gaping hole in his Mexican counterpart’s hands-off approach to diplomacy, with potentially ruinous consequences.

Mexico's President Andres Manuel Lopez Obrador attends a news conference at the National Palace in Mexico City, Mexico, May 31, 2019. REUTERS/Henry Romero

Mexico could face a severe economic shock if Trump makes good on a pledge to impose escalating tariffs of 5% on all Mexican goods from June 10 if the country does not halt a recent surge of migrants from Central America crossing the U.S. border.

The news, delivered in a tweet on Thursday evening, battered the peso and fueled concern about President Andres Manuel Lopez Obrador’s reluctance to engage in foreign affairs or push back against Trump on his touchstone issue of illegal immigration.

It also raised fears that the Republican president will keep attacking Mexico as he seeks re-election next year.

In power since December, the leftist Lopez Obrador has tried to deflect Trump’s barbs, insisting that the best way to tackle migrant flows is by jointly fostering development in Guatemala, Honduras and El Salvador, where most of the migrants apprehended on the U.S. border come from.

Trump has shown no enthusiasm for the idea.

In his day-to-day business, the 65-year-old Mexican president has stayed focused on domestic issues, pursuing a nationalist agenda of economic self-reliance and putting the brakes on foreign investment in the oil industry.

Foreign policy has been largely left in the hands of Foreign Minister Marcelo Ebrard, who has been dispatched to Washington to persuade the Trump administration to back down.

“Lopez Obrador doesn’t want to get involved in this, but it’s impossible to avoid,” said former foreign minister Jorge Castaneda, a longstanding critic of Lopez Obrador, who says he has failed to grasp the significance of the U.S. relationship.

“Relations with the United States in Mexico are not a foreign policy issue. They are a domestic policy issue.”

Around 80 percent of Mexico’s exports are sent to the United States, whose businesses by far account for the biggest source of foreign direct investment to the country. U.S. business groups and lawmakers have said tariffs could be devastating to both countries.

Lopez Obrador told his morning news conference on Friday he believes the U.S. government will ultimately “rectify” its position. Asked if he would change the country’s migration policy to accommodate Trump’s request, he said Mexico is already tackling the problem.

Mexican officials have signaled they will respond in kind if Washington actually imposes tariffs, steps likely to target regions with high concentrations of Trump voters.

But doubts are growing in Mexico about whether Lopez Obrador has taken the wrong tack by downplaying U.S. provocations.

Agustin Basave, a former diplomat and ex-leader of the center-left Party of the Democratic Revolution, said Mexico had to put cooperation on security, combating drug trafficking and migration with Washington “on the table” to stand up to Trump.

There was no point in trying to “appease” Trump because even if Mexico completely sealed its southern border with Guatemala, he would keep demanding concessions, Basave added.

Trump has said this year he will cut off U.S. aid to Central America and threatened to close the Mexico-U.S. border.

“He’ll use Mexico as a scarecrow the whole time,” Basave said. “And this will increase the closer the (U.S.) election gets.”

UNPREDICTABILITY

Mexico faces an uphill struggle to contain immigration, particularly in the wake of budget cuts to migration authorities made to fund Lopez Obrador’s flagship welfare policies.

One Mexican official, speaking on condition of anonymity, said the number of people seeking to reach the United States from the rest of Latin America through Mexico is now so great that Mexico could only hope to “administer” the problem.

Hector Vasconcelos, a lawmaker from the ruling National Regeneration Movement (MORENA) who heads the Senate foreign relations committee, said Lopez Obrador was right to try to manage tensions by not reacting to Trump’s broadsides.

“It’s always been a given for me that President Trump could do anything at any moment,” Vasconcelos told Reuters, pointing to how the U.S. election process was influencing his rhetoric.

“I think we need to get used to this being President Trump’s way of governing. So I don’t think there is a way out,” he added, saying that if Mexico had taken a more combative approach to Trump, bilateral relations would today be even worse.

Among diplomats and government officials, widespread unease about Lopez Obrador’s attitude extends beyond his dealings with Trump to the international stage in general.

In March, Lopez Obrador said he had asked Spain to apologize for crimes committed during the Spanish conquest of Mexico in 1519-1521, a step one foreign diplomat from a third country described as “nuts”.

The president’s announcement this month that he wanted to ditch the so-called Merida Initiative, a framework for security cooperation with the United States, did little to cement stronger U.S.-Mexico ties.

Sergio Alcocer, a former deputy foreign minister for North America, said the Merida scheme was beneficial to Mexico because it made Washington assume co-responsibility for security matters that have helped fan bilateral tensions over the border.

“If you leave the mechanism, you lose that,” he said.