Wall Street Doesn’t Have Much Nice to Say on Mexico Tariffs

The financial establishment has never been happy with President Donald Trump’s trade sanctions on other nations. China, for sure, but now especially Mexico. His threat on Friday to slap tariffs on Mexico produced a new spate of downbeat assessments.

The president’s unilateral action, made to pressure Mexico into stopping illegal immigration into the US, is a departure from his usual use of tariffs: to wrangle a better trade deal for America. Trump said he would impose 5% tariffs on Mexican imports to the US on June 10 if Mexico didn’t stanch the border crossings. And every month after that, the duty would rise by another 5 percentage points until it stood at 25%.

A typical judgment on Trump’s Mexico move came from Cliff Hodge, director of investments for Cornerstone Wealth: “The risk is that these tariffs, along with those imposed on China, pushes an already soft business cycle into a full-blown recession.”

It’s hard to find Wall Street economists and strategists who disagree with that sour view. The commentary in the wake of Trump’s Mexico announcement foresee a big negative impact on the US and a further fraying of the rest of the world’s trust in the Trump White House. The rare positive note—and pronouncing this as a plus is not universally accepted—is that the Federal Reserve might cut interest rates as a result.

After the collapse of Sino-American trade talks in early May, Trump imposed higher tariffs on Chinese goods, and Beijing retaliated. Morgan Stanley has warned that the latest China tariffs risk pushing the US into a ruinous slump, and Goldman Sachs has pinpointed US manufacturers as the biggest victims.

With the Mexico gambit, Trump risks dynamiting the new US-Canada-Mexico replacement for the North American Free Trade Agreement.

A sampling of Wall Street perspectives on the new Mexico policy:

The impact will be bad. To Brad McMillan, chief investment officer at Commonwealth Financial network, the cost to the US economy from a full 25% tariff hike would be $90 billion—admittedly a fraction of a $21.06 trillion GDP—and consumer prices for Americans could rise by about 0.4%, which would be of a larger magnitude, with prices up 1.6% lately.

“This may be about immigration,” Shane Oliver, chief economist at AMP Capital, told Bloomberg, “but it will just add to trade war fears and cause a further blow to business confidence in the US—as businesses will be wondering who will be hit next in their supply chain.”

Trump really, really can’t be trusted now. And the implications go beyond Mexico. For Chris Zaccarelli, CIO for Independent Advisor Alliance,

“It also adds an additional layer of uncertainty onto the trade negotiations with China because it will cause them to question whether it makes sense to make a deal with this administration if they are willing to use tariffs for other strategic issues later (e.g., military buildup in the Pacific or in regards to technological competition, etc.”

Rob Carnell, Asia-Pacific head of research at ING Bank, told Bloomberg: “It also dampens hopes for any resolution to the US-China conflict, showing just how easily the US administration resorts to tariffs, not just threats of tariffs, when they don’t get what they want.”

But … the Fed might trim short-term rates. That’s the view of BofA Merrill Lynch Research. In a report, it wrote that the Trump move “increases the likelihood that the Fed will have to cut rates to offset the pain from tariffs.”

For the time being, the firm contended, the Fed will stand pat, not wanting to look like a flip-flopper—Chairman Jerome Powell and others at the Fed have taken pains to be patient. Futures contract, though, have the Fed cutting rates by half a percentage point by year-end.

Is there any hope that the overall situation will be resolved without damage? Well, this latest broadside may be a negotiating ploy. Sean Callow, senior currency strategist at Westpac Banking, expressed hope that “that corporate America will lobby the White House hard enough to produce some form of backdown before the virtually unthinkable 25% tariffs threatened by October.” 

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Tags: China, Donald Trump, Mexico, Tariffs, Trade War