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Mexico

Trump’s tariffs on Mexico: Political ploy set to increase volatility on Mexican assets

  • The 5% tariff on Mexican goods sent to the US is set to kick in on 10 June.

  • This will increase by 5% every month until October, when they will be at 25%.

  • This is President Donald Trump’s strategy to force Mexican authorities to curb illegal immigration into the US.

Trump’s tariffs on Mexico: Political ploy set to increase volatility on Mexican assets
Rafael Elias
Rafael Elias

Director, Latin America Credit

Tellimer Research
5 June 2019
Published by

The 5% tariff on Mexican goods sent to the US is set to kick in on 10 June, and to increase by 5% every month until October, when they will be at 25%. Ostensibly, this is US President Donald Trump’s strategy to force the Mexican authorities to curb illegal immigration and the smuggling of drugs and people into the US.

There have been three key pieces of information today:

  1. A tweet from Trump effectively stating that he is not bluffing; 
  2. A comment to the media by White House trade adviser Peter Navarro saying that the tariffs may not have to go into effect; and 
  3. A statement by Mexican President Andrés Manuel López Obrador (known as AMLO) saying that a Mexican delegation will hold a meeting today in Washington DC at 3pm US time with their US counterparts, after which Minister of Foreign Affairs Marcelo Ebrard will issue a statement.

Locals in Mexico believe the initial 5% tariff is inevitable, since they believe Trump is hoping a tough line on Mexico will play well with his supporters ahead of a potential announcement next week that he will be seeking re-election. Moreover, many appear to believe that a 5% tariff would not be too damaging – they argue efforts should be directed at persuading the Trump administration to stop there.

One factor that makes the Washington DC negotiations difficult is that Trump has not defined the benchmarks that, in his view, the Mexican government would have to meet to prevent further tariff increases. He has not said what specific actions he would regard as acceptable or even indicated what he would consider positive steps.

Because of this, our view is that the timing and the step-up structure of the tariffs are more of a political campaign strategy than a sincere attempt to cut illegal immigration and curb drugs- and people-smuggling. Therefore, we find it difficult to believe that there will be no tariffs imposed whatsoever on Mexican exports to the US.

By the same token, we believe the tariffs will be temporary, particularly if Mexico and AMLO take a more defensive stance and opt to take the issue to the WTO or the courts, given the tariffs would be contrary to the (as-yet-unratified) agreements set forth in the US-Mexico-Canada Free Trade Agreement (USMCA). 

Additionally, several of Trump’s advisers, such as the American Chamber of Commerce, and some Republicans in Congress (including the Senate's Majority Leader Mitch McConnell), have expressed their opposition to the tariffs. The question, of course, is whether or not Trump will listen to his advisers and members of Congress.

In sum, it is still early to draw any conclusions. The outcome of the negotiations is completely uncertain (even more so given Trump is currently in Europe) and it is impossible to determine where political posturing ends and pragmatism begins.

Our view is that certain Mexican assets (including MXN and the bonds of export-oriented companies) are likely to remain volatile and highly reactive to any developments. Also, we believe it is reasonable to assume that Trump currently has the upper hand – the negotiations are unlikely to yield a definitive agreement without the US president having the final word.