By now, most investors are aware that President Donald Trump has threatened to collect a 5% tariff on Mexican exports to the U.S. starting on June 10. That increases to 25% in October if the Mexican government doesn’t do a better job fighting illegal immigration. And the tariffs are a terrible idea for Dow Jones stocks like Walmart (NYSE:WMT) stock.
Why? It’s easy — WMT stock imports vegetables and other products from Mexico and is already getting hurt by the China tariffs in place.
“Produce is a key traffic driver into stores, and higher input costs could force retailers to either absorb higher costs to preserve a competitive stance or pass through prices to customers,” stated Bloomberg Intelligence’s senior industry analyst Jennifer Bartashus.
In mid-May, Walmart’s CFO Brett Briggs stated in the company’s earnings call that it does have mitigation strategies in place to help minimize the cost, but ultimately, the tariffs will be passed on to consumers in the form of higher prices.
Add Mexican tariffs to the mix, and you’ve got a recipe for a recession, possibly a nasty one.
However, if you own Walmart stock, there’s still hope that the two sides will reach a deal that addresses immigration without resorting to tariffs. Mexican officials are set to meet with U.S. Trade Representative Robert Lighthizer, the man behind negotiating the USMCA trade agreement between Mexico, Canada, and the U.S.
How Much of an Economic Blow for Walmart Stock?
According to Perryman Group, a Texas-based economic research firm, the job losses in Texas and California from Mexican tariffs could hit 117,000 and 50,000 respectively with the entire country losing as many as 400,000 jobs from Trump’s border battle with Mexico.
A loss of 400,000 jobs would be the equivalent of two months worth of recent job gains.
The hardest hit industry would be the retail trade, which could expect to lose almost 140,000 jobs were the 5% tariff to stay in place for an entire 12-month period. In terms of gross domestic product, the 5% tariff would result in a $42 billion hit to the economy.
What it doesn’t say is how much of an effect a 25% tariff would have on the economy. However, it’s fair to say that it would reduce GDP by at least $210 billion (five times the 5% tariff) if enforced for an entire year.
“Mexico has long been a top trading partner for the United States,” said Perryman Group CEO Ray Perryman about the report. “In fact, Mexico recently passed China to become the largest, due in part to trade issues with China, which has reduced the volume of U.S.-China trade. To impose a tariff on all goods from our largest trading partner will cause significant cost increases and other harms to the economy.”
I wouldn’t think Walmart’s customer base would be nearly as able to withstand price increases as a result of tariffs compared to, say, that of Costco (NASDAQ:COST), whose target customer is significantly wealthier both in terms of annual income and net worth.
A prolonged tariff war on two fronts (China and Mexico) would be devastating for Walmart and its customers.
The Republicans and Democrats must figure out how to bring the President down from his perch before a recession gets underway as a result of these tariffs.
The Bottom Line on WMT Stock
The U.S. gets approximately 40% of its fruits and 70% of its vegetables from Mexico. These are items that can’t sit around for a long time before being exported. Therefore, Walmart isn’t going to be able to do much to mitigate many of the costs of the Mexico tariffs.
Should these tariffs carry on for more than a few months, Walmart’s grocery business could suffer more than most given its demographic.
With less than a week to negotiate a way out of the tariffs, Walmart stock shareholders better hope politicians care about the common man because the Mexico tariffs would be an insult to injury given what’s already in place for Chinese goods.
Until this sorts itself out, I’d be wary of buying Walmart stock.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
