Where U.S. Tariffs Stand Now After Trump Mexico Tweet

Tariffs are back in the news in a big way. President Donald Trump announced on Thursday — via Twitter (NYSE:TWTR), naturally — a 5% tariff on all goods entering the U.S. from Mexico. Mexican stocks fell on the news, with the iShares MSCI Mexico ETF (NYSEARCA:EWW) falling nearly 4% in early trading Friday. EU stocks tumbled overnight, though Chinese stocks, perhaps surprisingly, have held up somewhat well.

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The new tariffs on Mexico — which are slated to rise unless or until the country significantly slows migration into the U.S. — are among several imposed by the Trump Administration. And while the various tariffs have made news, their impact on investors so far has been relatively muted.

The fear now, as equities worldwide selloff, is that the new front on the trade war will be one too far. U.S. GDP projections for the second quarter have come down to a median estimate of 1.6%. China’s economy likely is taking a hit. Growth in the Eurozone continues to be stagnant. There’s certainly a sense that both a precarious global economy and wobbly equity markets could tip with the slightest push.

In that context, it’s worth understanding Thursday’s news in the context of tariffs imposed so far. The new tariffs on Mexican goods aren’t the biggest ones imposed — yet.

But that doesn’t mean they won’t be the most important or the most damaging.

Trump Tariffs So Far

It took just over one year for the Trump Administration to start playing the tariff card. In January 2018, the U.S. imposed levies on solar panels (at a 30% rate) and washing machines (20%), citing significant injury to domestic producers. Those tariffs weren’t targeted at China in particular, but given that the rising Asian giant manufactures the majority of the world’s solar panels, China felt the biggest hit.

Less than six weeks later, the Administration added steel and aluminum to the list. Four countries — South Korea, Argentina, Australia and Brazil — received permanent exemptions. The European Union, Mexico, and Canada were excluded on a temporary basis to allow for bilateral negotiations. On June 1, 2018, however, those countries were included as well. As part of negotiations over the USMCA (United States-Mexico-Canada Agreement), this month tariffs were removed from Mexican and Canadian imports.

From that point, the focus turned to China. China had retaliated against the steel and aluminum levies with tariffs of its own. In May 2018, both countries agreed to put the trade war on hold to continue negotiations. When talks failed, the US implemented new tariffs on some $50 billion of goods in two separate moves.

In September, the U.S. added another $200 billion in goods to the list, at a 10% rate that would rise to 25% by January 1, 2019. China again retaliated; a pause again was declared in December. Talks failed once more. The U.S., adhering to a deadline it had set, raised the rate to 25% in early May.

Then, this week, Trump announced the 5% levy on all Mexican goods. That rate, too, could rise to 25% if the Mexican government doesn’t meet unspecified, vague goals.

Where We Sit Now

For all the noise about tariffs over the past eighteen months, it’s mostly U.S.-China trade that is affected. The U.S. has levied tariffs on $250 billion in Chinese goods; China, in turn, has targeted $110 billion in U.S. products.

The USMCA negotiations had led to the lifting of retaliatory tariffs by Canada and Mexico. Whether that will hold amid the new levies on Mexican imports remains to be seen. In the meantime, Mexico will see a 5% tariff beginning in July that will rise 5% each month through October to a potential maximum of 25%.

The European Union has added its own tariffs on automobiles and motorcycles, which most notably have hit U.S. manufacturer Harley-Davidson (NYSE:HOG). There, too, talks appear to have broken down. Both sides additionally continue to argue over alleged airline subsidies, part of the broader battle between Boeing (NYSE:BA) and Airbus (OTCMKTS:EADSY).

Admittedly, in the context of the global economy — roughly $88 trillion in GDP — even 25% tariffs on less than half a trillion dollars’ worth of goods seems relatively minimal. Most countries have no part in the trade war. And hopes persist that the U.S., in particular, can negotiate new deals — or back off from an escalating game of chicken.

But in an interconnected world, tariffs can cause disruption. And at least on Friday, investors clearly are showing their discomfort with the surprise move toward Mexican products.

Is This an Overreaction?

It is worth pointing out that, for all the noise, tariffs haven’t really impacted equities all that much. Chinese stocks clearly have taken a hit. Big names like Alibaba (NYSE:BABA) and Tencent Holdings (OTCMKTS:TCEHY) declined sharply toward the end of last year, and have weakened again of late. For Chinese plays, there’s been a clear correlation between trade sentiment and stock prices.

But elsewhere, the impact of tariffs on equities has been muted. EU stocks, using the Euro Stoxx 50 index, have rallied since Trump’s election despite weak domestic economies. Even Mexican stocks are essentially flat. US equities occasionally have been shaky but have performed even more strongly.

So far, trade wars and tariffs haven’t really hit stocks. The December dip — driven in part by trade concerns — proved to be a buying opportunity. It’s possible that recent declines may prove to be the same.

But the broader, deeper fear is that even a seemingly small 5% tariff winds up being one step too far. The imposition of levies on Mexico during USMCA talks has raised questions about whether China can negotiate with a rival who may change its policy on a whim.

The U.S. presidential election now is less than 18 months away; Trump’s re-election prospects are roughly 50/50 at the moment, at least per betting markets. Might trade partners choose to simply wait out the current Administration in hopes of finding a new, more trade-friendly, replacement?

If tariff hikes continue through early 2021, equity markets are going to feel pressure. And some investors clearly are looking to get out ahead of that eventuality. It remains to be seen whether that’s prudence, or an overreaction.

As of this writing, Vince Martin has no positions in any securities mentioned.

Article printed from InvestorPlace Media, https://investorplace.com/2019/05/where-u-s-tariffs-stand-now-after-trump-mexico-tweet/.

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