Mexico: First Round of 5% Tariffs Coming

Published on June 5, 2019
SGH Insight
*** We believe it is highly likely President Donald Trump will defy the immense and highly public resistance from his anti-tariff Republican Senate caucus, and deliver on his threat to institute 5% tariffs on imports from Mexico in a sign of continued dissatisfaction with the measures the government of President Andres Manuel Lopez Obrador (AMLO) is expected to propose today to address the White House’s concerns over the crisis at the US-Mexico border
Market Validation
(Bloomberg 6/6/19)

Yen Gains With Treasuries on U.S.-Mexico Tensions: Inside G-10
The yen snapped a two-day decline versus the dollar and Treasuries advanced as demand for haven assets rose after trade talks between the U.S. and Mexican officials ended without an agreement Wednesday.
Speculation that the U.S. will follow through with tariffs next week increased as President Donald Trump said “not nearly enough” progress was made in discussions with Mexico to mitigate the flow of undocumented migrants and illegal drugs. Talks will resume Thursday, he said.
USD/JPY slid as much as 0.3% before trading 0.2% lower at 108.21. USD/MXN jumped as much as 1.3% .


*** We believe it is highly likely President Donald Trump will defy the immense and highly public resistance from his anti-tariff Republican Senate caucus, and deliver on his threat to institute 5% tariffs on imports from Mexico in a sign of continued dissatisfaction with the measures the government of President Andres Manuel  Lopez Obrador (AMLO) is expected to propose today to address the White House’s concerns over the crisis at the US-Mexico border. ***

Vice President Mike Pence is scheduled to host Mexico’s delegation to the US led by Foreign Minister Marcelo Ebrard today to review, in coordination with Secretary of State Mike Pompeo, the hastily cobbled together response from Mexico City to Trump’s demands for robust measures to stem the flow of migrants through their country to the United States, or else face the consequences of mounting tariffs, starting at 5% on Monday, June 10.

After initially selling off on Trump’s threats, markets have taken some solace over the last few days at the mounting uproar from within Trump’s own caucus over his threats to impose tariffs on the grounds of a national emergency at the border, with senators threatening to pass a Resolution of Disapproval should Trump go ahead, and to challenge the invocation of emergency powers to use tariffs as a tool to address immigration policy. Furthermore, the talk in Washington has been that the Senate could even have enough votes to pass a resolution that would garner the two thirds majority necessary to override even a veto by the President himself, afterwards.

To top things off, efforts yesterday by White House Deputy Counsel to the President Pat Philbin to smooth over the rebellious GOP senators, as widely reported in the press, went nowhere, with almost every senator present reported to have come out vociferously against tariffs on Mexico, or using tariffs as a tool for immigration policy.

Last night, House Minority Leader Kevin McCarthy indicated the GOP members in his chamber, for their part, would have the President’s back, so to speak, should he decide to proceed with a tougher stance on Mexico.

Furthermore, while Mexico’s President AMLO has tried in advance of the meetings to paint an optimistic picture (citing 80% odds) of his chances for averting a clash with Trump, from what we understand, as of the latest readings, Mexico’s proposals failed to address the biggest, and most difficult demand from the US side – namely that Mexico agree to accept third country US asylum seekers and not allow them to proceed through to the United States for processing.

Perhaps most to the point, we do not believe President Trump will be willing to accept a modest proposal from Mexico in the name of averting the disaster economists are universally predicting would happen should the US enter into a (full) trade war with Mexico on this – the number one issue for his base – only to be faced with continue problems at the border leading into the 2020 campaign.

Indeed, from what we understand, the first round of tariffs, at 5%, is at this point almost a lock, with negotiations with a duly chastised Mexico to proceed then from there.

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