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.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
©2021 AGF Management Limited. All rights reserved.