The “Tariff Man” Strikes Again — Five Enormous Implications
Author: Greg Valliere
May 31, 2019
TRADE TARIFFS AREN’T JUST ABOUT TRADE ANYMORE: President Trump’s imposition of an 5% tariff on all Mexican shipments stunned Congress and the markets, jeopardizing the USMCA trade deal and sending a signal that “trade tariffs aren’t just about trade anymore,” as one reader emailed us during the night. These tariffs break new ground — they’re political, a punishment to Mexico for not stopping the surge of immigrants from Central America.
IF IMMIGRATION THROUGH MEXICO DOES NOT CEASE, Trump said the 5% tariff will increase to 10% on July 1, to 15% on Aug. 1, to 20% on Sept. 1 and to 25% on Oct. 1. This has been universally panned by trade experts in both countries; one predicted this will weaken Mexico’s economy, simply driving more illegal immigrants into the U.S.
THERE ARE FIVE ENORMOUS IMPLICATIONS —
1. JUST AS CANADA AND MEXICO WERE PREPARING to ratify the NAFTA replacement deal, called the USMCA, this obviously throws a monkey wrench into the process. Canada was moving this week to ratify the deal, but it’s difficult to imagine the Mexican Congress approving any pact with the U.S; there will be a clamor for retaliation. And with Nancy Pelosi locked in a bitter feud with Trump, it’s unlikely she will cooperate and agree to signing off on the USMCA without major changes.
2. THIS FINALLY COULD AWAKEN THE SLUMBERING U.S. CONGRESS: The most important Republican on trade issues, Sen. Charles Grassley, blasted Trump’s move as “a misuse of presidential tariff authority and counter to congressional intent.” Will Congress seek to block Trump’s tariff wars? Lawmakers are on recess this week and most did not react immediately, but we suspect that this issue — not Robert Mueller’s report or Trump’s taxes — will finally provoke Republicans in Congress.
3. HE’S NOT DONE: In addition these new tariffs against Mexico, there’s an increasing prospect of major new tariffs against the EU, largely over aircraft subsidies. Retaliation from Europe seems very likely. Just wondering — when will much more expensive imports — from Bordeaux wine to European cars — begin to heat up inflation?
4. TRUMP APPARENTLY IS UNCONCERNED BY THE MARKET AND ECONOMIC DAMAGE that tariff wars are inflicting. We thought that some of his economic advisers — such as Larry Kudlow — would have a moderating influence on the president, warning him of volatile markets and weaker economic growth ahead of the 2020 presidential campaign. But Trump apparently won’t listen — perhaps he’s happy to see the Treasury 10-year bond yield below 2.20% this morning.
5. TRADE IS NOW SUCH A HEADWIND for the economy that the Federal Reserve may have to throw in the towel and cut rates in the second half — debate in the markets is whether there will be one move or two. But as an economist friend told us last night, Fed rate cuts may not be sufficient to reverse the damage done to global economic growth and confidence, as the U.S. president threatens to impose even more tariffs this summer.
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