Trade War: The Second Front

After ratcheting up trade tensions with China, the Trump administration has threatened tariffs on Mexico over illegal US border crossings. Our Head of Equities, Stephen Dover, explains why he thinks US-led trade tensions on both fronts are likely to drag out and gives his take on the potential impact on markets.

It has been said that economic expansions don’t die of old age—they get murdered, usually by inflation or by the US Federal Reserve’s attempt to control them.

However, we think we may be entering an era where a “policy error,” in this case trade policy and tariffs, increases the likelihood of a recession and downward pressure on the markets. As I mentioned in a previous article, trade tensions between the United States and China escalated last month, creating volatility in global equity markets.

Now, US President Donald Trump has opened up trade tensions on a second front by threatening tariffs on Mexico over illegal border crossings.

A Bit of Background

On May 30, President Trump tweeted he would levy a 5% tariff on all Mexican goods by June 10 if Mexico doesn’t stop the flow of undocumented immigrants to the United States. In a later presidential statement, Trump said the tariffs would rise to 25% by October and stay at that level until Mexico acted. These actions link immigration and trade together.

While announcing these tariff threats, Trump took a different approach from past tariffs on other trading partners. The president invoked the International Emergency Economic Powers Act (IEEPA), which disallows both the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO) to give any relief in this matter.

That said, there is a possibility that this tariff may not be implemented if (1) an agreement is reached at the summit on June 5 between Mexican Foreign Minister Ebrard with his US counterpart Mike Pompeo, (2) the US courts rule the tariffs illegal, or (3) by congressional action.