A Second Front in the Trade War Opens

The Second Front in the trade war just opened, with Mexico. Why? Donald J Trump’s racial fears are such that he believes he can force a sovereign state to do his bidding by imposing a five percent tariff on all goods imported. It could get as high as twenty-five percent, because that is the cap, at the moment. And yes, the language used by the White House is one of racial animus. The first paragraph makes this crystal clear.

As everyone knows, the United States of America has been invaded by hundreds of thousands of people coming through Mexico and entering our country illegally. This sustained influx of illegal aliens has profound consequences on every aspect of our national life — overwhelming our schools, overcrowding our hospitals, draining our welfare system, and causing untold amounts of crime. Gang members, smugglers, human traffickers, and illegal drugs and narcotics of all kinds are pouring across the Southern Border and directly into our communities. Thousands of innocent lives are taken every year as a result of this lawless chaos. It must end NOW! (My emphasis)

The president does not understand how tariffs work. No, this money will not go to the US treasury and for some goods, it will be much higher than five percent from the get-go. Nor does he understand modern supply chains. Some goods go back and forth a few times before they are sold to the consumer. And if they are hit with a five percent tariff every time they cross the border from Mexico, it could easily make that unaffordable very fast. Why? It is you, the final consumer, who will pay these increases. Companies will pass the cost to you, of now two major trade wars. And if things were not done, China has already responded with 60 billion in tariffs on American goods.

So where exactly will you get hit?

Between China (electronics, shoes, clothes, toys, and other manufactured goods) and Mexico (Auto, veggies, fruits, manufactured goods), you will be hit in almost everything you buy. Sooner or later this will come up in the official inflation rate, because sooner or later it will also hit luxury goods, such as planes and yachts. It is a mystery to me why those goods are part of the essential basket of goods that every American buys. Last time I checked, a Gulfstream private jet is not in my most have things, but I digress.

This is already closing markets to American farmers. Fun fact, the US still is the major provider of corn to Mexico. Oh never mind that Mexico has been diversifying its providers. For the moment Brazil is becoming a major provider to Mexico as well.

And at one point Mexico considered tariffs on both US Corn and Soy. And something is telling me those are back on the table. In fact, Pascal Beltrán del Río, head of the Mexican Chamber of Commerce told as much today to Imagen Radio, which was quoted by Excelsior:

No hay duda que si pasan los días y empieza esta amenaza a concretarse con el primer arancel del 5 por ciento, y nuestros productos empiezan a ser gravados, en ese momento tendríamos que reaccionar con medidas similares. ¿En dónde?, en donde más le puede afectar a Estados Unidos” que son los productos agrícolas, afirmó.

>There is no doubt that as days pass, and the threat of a five percent tariff becomes real, and our products are taxed, we would have to react with similar measures. Where? Where will the United States be the most affected, but with agricultural products.

In the meantime, the US Chamber and other organizations are considering taking the White House to court. According to CNBC:

The powerful U.S. Chamber of Commerce is mulling its legal options in response to the duties, the group’s Senior Vice President of International Affairs John Murphy told reporters Friday. Business groups more broadly are discussing the possibility of suing the White House, and a decision on how to proceed is expected by Monday, a source told CNBC.

In the meantime, the Mexican Minister of foreign affairs is on his way to Washington for emergency meetings. Complicating matters, the North American Free Trade agreement was on its way to Congress for ratification and may be at risk at this point. The stock market is in danger of seeing a month with losses since it is also going down.

There is also another thing to consider. We have a supply chain that goes back and forth. So what happens with products that repeatedly cross the border in the manufacturing process? This will also make autos that more expensive, $1300 dollars is not chump change if rates reach twenty-five percent. And if you need parts to fix your car…guess where a lot of them are coming from?

”We believe the tariffs on vehicles would undoubtedly be passed on to consumers,” wrote Emmanuel Rosner, auto analyst for Deutsche Bank. If the Trump administration enforces the full 25% tariff, it would increase the price of vehicles sold in the United States by an average of about $1,300, Rosner said.

That price increase would hurt demand for cars, perhaps cutting US auto production by as much as 3 million vehicles a year, an 18% drop from current levels, Rosner estimates.

If that happened, it would be the greatest blow to the US auto industry since the Great Recession sent the industry hurling toward near collapse 10 years ago.

The industry imported $59.4 billion in parts from Mexico last year, according to US government trade data. That includes parts used in factories and those sold in auto parts stores and repair shops.

Incidentally, one of the sectors hit hard in morning trading was the auto sector. They are already showing signs of stress, and this could be quite bad.

Maybe Bill Weld, former Massachusetts governor who is challenging Trump for the Republicans nomination is correct. The president would rather have a white nation with no immigration. And he is willing to do all he can to reverse historic trends leading to the browning of the country. If this means a recession or worst, he will make the country pay that price.

We know that Trump does not believe tariffs to be a bad thing. He is stuck in a pre-World Trade Organization world view, and shares that with Herbert Hoover. At least the latter had an excuse. His views on protectionism were standard economic thinking in his day. The revolutionaries were those who believed in trade and open markets.

Then there is Bob Mueller, who ruined the storyline that the president was above board. If anything the now-former Special Counsel made clear that the only reason he could not indict was a DOJ policy that places the president above the law. So, of course, the president needs to distract, and this is a favorite of the president.

One has to wonder if the president is able to understand the consequences. He has a good economy, and that would go a long way to win a second term. His policies may very well start a recession or worst. This economic cycle is already way old in the tooth. So any stressor and a second front in the trade war qualifies should start an economic slowdown.

Incidentally, while Trump stomps his feet, Manuel Lopez Obrador is investing Mexican money in the Triangle. He is aware of something our president seems incapable of. If you want to stop immigration you need to change the dynamics in the home countries. This is done by creating jobs and improving the security situation. It literally was his first act in office. There are many things that AMLO has done that may be questionable. But that one is correct.

In the meantime, the United States has cut aid to these countries. It is baffling, but the president insists on cutting his nose to spite his face.

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Bush thanking Mexican Marine, via Wikipedia

We can say that now it is a distant memory when the US and Mexico had a close relationship. It was so close that after Katrina Mexican Marines assisted in search and recovery. In fact. they were thanked by President George W Bush. I suspect that we will not see this in some time. At the very least not under this president. He is isolating the United States in ways that are dangerous, and partly due to his racism. When Weld said that he wants a country with no immigrants. at least not the wrong kind of immigrants, which Latin Americans are for white supremacists, and as I have said in the past, Trump is a fellow traveler.

Historian by training. Former day to day reporter. Sometimes a geek who enjoys a good miniatures game.

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