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On Thursday night, President Trump reignited the trade conflict with Mexico. You may be thinking, “Wait, didn’t he repeal the steel and aluminum tariffs two weeks ago, and didn’t the White House just submit to Congress the revised NAFTA deal, now known as the United States-Mexico-Canada Agreement, or USMCA?
Along with those actions that seemed to indicate that trade tensions with our southern neighbor had been quelled, the President said that the U.S. would impose 5 percent tariffs on ALL Mexican imports (no exceptions!) starting June 10, unless the flow of Central American migrants stops. If Mexico does not act, those tariffs will increase by five percentage points monthly, until they reach 25 percent on Oct. 1.
If this were to go into effect, it would be a big deal. Here’s why:
1) Mexico is the largest trading partner with the U.S. The U.S. imported $346.5 billion worth of goods in 2018, everything from automobiles and parts, to fruits and vegetables to beer and liquor. The tariffs could raise the price of all of those goods for U.S. consumers, not to mention they could threaten the nearly 5 million U.S. jobs, which depend on trade with Mexico.
2) The auto sector is worried. The U.S. imported $52.6 billion in cars and $59.4 billion in auto parts from Mexico last year, according to government trade data. Mexico-built vehicles represented 17 percent of all U.S. sales last year and about 16 percent of all auto parts used by U.S. assembly plants come from Mexico. According to the Center for Automotive Research, “No vehicle assembled in the United States is 100 percent U.S.-made; the average vehicle produced in the United States relies on 40 to 50 percent imported parts and component content.” Because integrated supply chains have been in operation for more than two decades, many components cross the border several times during production.
3) Tariffs are now weaponized for non-trade disputes. President Trump invoked the obscure International Emergency Economic Powers Act as the basis of the new tariffs. This alarmed economists because it means that the administration is willing to use tariffs for non-economic reasons.
4) Economic growth could take a hit. The U.S. economy performed better than expected in Q1 (GDP increased at an annualized pace 3.1 percent), but was already set to slow down in Q2. The U.S. Chamber of Commerce is sounding the alarm: it conducted a new analysis, which outlines the state-by-state impact of the administration’s threatened Mexican tariffs. The data illustrate the price to be paid by American families and consumers: tariffs “would result in a potential tax increase on American businesses and consumers of $17 billion. Furthermore, that number would eclipse $86 billion should the tariffs reach the President’s threatened cap of 25 percent.” OUCH!
5) Investors are already nervous. Some are trying to quantify the impact on specific companies and industries, but the take away is uncertainty abounds. While President Trump could back down from the newest round of threats, investors are worried that presidential tweets can upend reams of analysis in a split second. As economist Joel Naroff notes, “We have entered a period of major uncertainties and that cannot be good for the markets, which were already reeling from the Chinese trade war. Can we really fight two trade wars at the same time?” The answer, at least for the month of May, is no. U.S. stocks closed the month down more than 6.5 percent, their worst monthly performance since December. Still, all major indexes are firmly higher on the year. The S&P 500 is up nearly 10 percent and the NASDAQ Composite is ahead by over 12 percent.