With stock markets still reeling from six straight weeks of declines due to concerns about trade, we now have to worry about Mexico as well with Trump’s latest assault.
The trade war between the United States and China has been going on for over a year now. There have been various degrees of hope along the way, when it would start looking like the war might be coming to an end, but it continues to rage on, and the situation is at its lowest point thus far.
Things could still get worse though, and the longer we go without a trade deal, the more patience the stock market loses. It looks like it very well may get worse before it gets better. The U.S. has more ammo loaded in their guns, where President Trump has already made clear that more tariffs are in store if we don’t reach an agreement soon, and the Chinese have recently fired back with threats of disallowing rare earth metal imports, in addition to suggesting that they may have even more planned.
We spent a good part of 2019 with a positive outlook on a trade deal happening in the near future, but this view has been replaced by more concern than we have ever had about this issue. As this war has escalated and we seem to move further and further away from a resolution, stock markets have expressed their clear disapproval.
We’ve now endured six straight weeks of losses with the Dow with no real end in sight. None of these moves have been met with any real strength, and when we have gotten positive days, they are fewer and of a lesser magnitude than the down days. The overall sentiment is clearly beat down.
The Trade War Breaks Out on an Entirely New Front
Just when we thought that things couldn’t get much worse right now, Donald Trump stepped up on Friday and fired another shot, this time at Mexico. This new front may be even more dangerous than the Chinese one, for a number of reasons.
As a general rule, when bad news hits the markets, such as Trump’s starting out with a 5% tariff on Mexican imports and then having it automatically escalate to 10%, 15%, 20%, and 25%, may produce a good-sized selloff such as the 1.5% we saw Friday, but it then has its day and we move on. Should new bad news come, that will weigh in as well, but once the news has been digested it generally doesn’t persist much past the announcement date.
This new news about the Mexican tariffs might be different though. Some have already said that the market has not really priced in the negative effects of this, and that’s very likely. This is a big deal if it stands and might take some real time to fully digest and appreciate.
What really stands out with this news isn’t so much the effect it will have on American business, although you can bet that this will be big enough in itself. Mexico plays a significant role in the supply chain of a lot of U.S. businesses and this will hurt not only them but American consumers who will have to pay more for a lot of things, not only for Mexican imports but for a lot of domestically produced goods as well.
The biggest concern here is that the Mexicans don’t really have a way out of this. Trump is demanding that they stop allowing illegal immigrants from crossing the border into the United States, which is a task that even the U.S., with all their resources, can’t do much about. If Trump could solve this by himself, he wouldn’t need to be demanding any of this, but he cannot, and the Mexicans certainly cannot do much about it.
We really seem to be headed for an impasse here, where this tariff will escalate to 25% and remain there as long as Trump sticks to his guns. It is quite unlikely that he will survive the next election, but he still has a year and a half to do his worst, and this move may indeed be his worst.
We will be hoping that China and the U.S. can shake hands, and that might happen, although with Trump at the helm, with his nose of steel, nothing is certain or close to it. With Mexico, the only real hope is that he will back off completely, because it isn’t even possible for his demands to be satisfied substantially, although it’s not even clear what it would take for them to comply with them at this point.
This Is a Great Way to Hurt the Economy and the Stock Market Further
If Trump’s goal is to help the American economy and the stock market, he’s surely going about this the exact wrong way. It’s one thing for him to be tough in hammering out a deal with China, as that can at least have a happy ending, and will if we ever get there, but his being willing and eager to sacrifice both to his obsession with immigration, with nothing but harm coming from this, takes things to a new level entirely.
When a country uses tariffs as a tool, it is a form of self-sacrifice, turning its guns on its own people in essence. The other side turns their guns on themselves and hopefully cooler heads end up prevailing. When you do this, you do want to be careful to ensure that the end justifies the means, and maybe it does with the Chinese tariffs, but with these Mexican tariffs, it simply cannot.
The ideal situation from a business and an economic standpoint is zero trade tariffs and zero trade restriction, and this is why stock markets love free trade and absolutely hate tariffs. Business also loves immigration, especially the kind that come to your country and work for as cheap as a lot of Mexicans do, even below what it is legal to pay them.
Illegal immigrants are welcomed with open arms by business and even cities now, as well as many people, including the immigrants of course as they are left better off as well. While we may seem to be stepping up enforcement at the border from time to time, overall, we take a very accommodating approach to illegal immigration.
If we really wanted to stop this, we could just raid the companies that employ these people, and there are a lot of companies and a lot of workers involved. All you do is deport them and criminally charge the people responsible and we could virtually put an end to this.
While these workers keep the produce flowing and construction projects humming, and improve the bottom line of these companies very significantly, we could grind all this to a halt if we wanted to and also make sure it doesn’t come back by sending enough executives to jail. We could do this if we wanted to, but we do not.
We complain about the additional costs with social programs and benefits that illegal immigrants involve, they actually don’t get a lot of these benefits now, and the main cost by far is the cost of educating their kids. That would be pretty easy to get a grip on as all we’d have to do is require that kids attending school be legal residents, if we wanted to that is.
If you deny admission to the children of these immigrants, and also use this as a stepping stone to deporting the rest of the family, you can bet that this would put a stop to all this once and for all. This would remove the problem and make these workers net contributors to the public coffers, if that was what we wanted.
We don’t want to bother with this though, and would rather build a wall and hire more border guards. This only makes sense if you are a contractor to the government that benefits from all this extra spending. It is important to keep borders secure, but there is only so much you can reasonably do, and what you can reasonably do does not include these planned tariffs.
The fear about all this illegal immigration is that it takes jobs away from Americans, but given that we have virtually full employment with documented workers as well as all this undocumented employment, this is a sweet deal for both the American economy and all its residents.
Fighting a trade war on two fronts is a bad idea in itself, even if it made sense, as long as we realize that both fronts will do damage and there’s only so much damage that we will be able to bear. This actually weakens the U.S.’s position in its battle with China, as if they are waiting to find out who will break first and by how much, breaking yourself further is surely not a good plan.
Perhaps the most ironic twist here is that, by seeking to harm the Mexican economy, this will increase the amount of people fleeing their country for the United States. If the goal really is to reduce illegal immigration, there’s no reason why this would not have the opposite effect.
While we wait and hope that cooler heads may prevail, or in this case, cooler head, this battle just got started and it’s very unlikely that Trump will just pull this all off the table before it really gets started. The manner in which this is planned to be escalated suggests the opposite, and this issue may be a big millstone around our necks for some time.
This coming week sure looks like it will be consecutive down week number seven for stocks, and as we realize just how much of a problem this will actually be. This is the last thing the stock market needs right now, and if Trump is looking to derail it, his plan looks brilliant.