2-front trade war

Trump’s 2-front trade war triggers alarms

The president’s surprise decision to expand his trade fight faced sharp backlash from U.S. investors and manufacturers.

By BEN WHITE and ADAM BEHSUDI

President Donald Trump’s decision to open a second front in his trade war sent tremors through global markets, unnerved corporate America and spurred economists to raise new warnings about the potential for a sharp economic slowdown just as the 2020 presidential contest heats up.

Trump’s surprise Thursday night threat to impose tariffs — beginning at 5 percent and potentially rising as high as 25 percent on Mexican exports to the United States — also threatened to raise consumer prices on everything from avocados to blue jeans to automobiles.

The fresh trade war salvo came with markets already sagging on fear of an escalating battle with China and economists wondering whether the American economy could withstand the impact of bruising fights with two of the country’s biggest trading partners.

“A two-front trade war is clearly negative for growth, and I don’t know how our trade officials even have the bandwidth to deal with it,” said Megan Greene, global chief economist at investment firm Manulife. “It’s not just millennials not being able to afford their avocado toast. Auto parts in particular go back and forth several times before they get to the final product, and if each time you have to add a tax to that, it’s going to compress margins and could even put some smaller firms out of business.”

Trump’s announcement, born of his deep frustration at what he perceives as Mexico’s unwillingness to do anything to stop the flow of migrants to the U.S. border, poses its most direct threat to integrated supply chains that depend on the free flow of goods across the border, especially the automotive industry.

Around two-thirds of U.S. imports from Mexico, which totaled $371.9 billion last year, were “related-party” trade, meaning companies bringing in parts and products as part of their supply chain, according to data compiled by Deutsche Bank. The U.S. imported $124 billion in auto products from Mexico in 2018, which includes new and used passenger vehicles; medium, heavy and other trucks; and auto parts, according to the International Trade Administration.

Some auto parts cross the border as many as eight or nine times before becoming finished products, potentially opening up auto giants including GM, Ford and Fiat Chrysler to tariffs exponentially higher than the headline number.

“The most important and the second most important and the third most important part of this is cars, car parts, trucks and buses,” said Torsten Slok, chief economist at Deutsche Bank Securities. “This has everything to do with the auto industry, which is by far the biggest beneficiary of our relationship with Mexico and where you will see the most pain if this goes through.”

On any given day, more than $452 million worth of auto parts are traded in either direction across the U.S.-Mexico border, said Ann Wilson, senior vice president of the Motor and Equipment Manufacturers Association.

“Our members flourish in an atmosphere of certainty,” said Wilson, adding that Trump’s other tariffs on China, steel and aluminum, and the threat of penalties on all imports of autos and auto parts, have already impacted investment and hiring decisions by her group’s 1,000 member companies.

The big three automakers fought hard for adoption of the U.S.-Mexico-Canada Agreement, Trump’s successor to NAFTA, which now awaits an uncertain fate in Congress. And they have strongly opposed Trump’s threats to impose tariffs on auto imports from Japan and the European Union.

The companies also celebrated earlier this month when Trump agreed to lift steel and aluminum tariffs on Mexico and Canada, which raised their production costs. They now face a new and perhaps graver threat. Deutsche Bank estimated the Mexico tariffs could raise the cost of vehicles sold in the U.S. by about $1,300.

Business groups in Washington quickly slammed Trump’s decision, which White House officials indicated came after a haphazard internal process and against the advice of some of the president’s more free trade-oriented advisers.

“Intertwining difficult trade, tariff and immigration issues creates a Molotov cocktail of policy, and America’s manufacturing workers should not be forced to suffer because of the failure to fix our immigration system,” National Association of Manufacturers President and CEO Jay Timmons said in a prepared statement. “These proposed tariffs would have devastating consequences on manufacturers in America and on American consumers.” The Business Roundtable said unilateral tariffs on Mexico would be a “grave error.”

“These tariffs will be paid by American families and businesses without doing a thing to solve the very real problems at the border,” Neil Bradley, executive vice president and chief policy officer of the U.S. Chamber of Commerce, said in a statement.

Shares in all three automakers fell on Friday. GM, which has the most exposure to Mexico, dropped over 4 percent. Fiat Chrysler shares fell nearly 6 percent and Ford ended down about 2 percent.

The broader market also took a hit from Trump’s announcement with the Dow closing down 354 points, or 1.4 percent, on Friday following fears about the deepening trade battles and a more uncertain future for the USMCA. The S&P and Nasdaq also dropped over 1 percent.

Bond yields also fell and prices rose as investors fled to safer assets while the trade wars intensified and the outlook for global growth darkened.

The selling, which began in Asia and in U.S. futures after Trump’s announcement Thursday night, capped a brutal month for stocks that saw the Dow drop 1,777 points, or nearly 7 percent. The broader S&P is also dropped nearly 7 percent percent on the month, and the tech-laden Nasdaq fell close to 8 percent.

“This is a colossal blunder,” said David Kotok, chief investment officer at Cumberland Advisors. He said the advice of Peter Navarro, one of Trump's top trade advisers who favors liberal use of tariffs, “is wrongheaded and sinking his president.”

Much of the selling began in early May after talks with the Chinese about a trade deal broke down and Trump threatened to impose tariffs of 25 percent on over $500 billion in exports to the U.S. from China. China has promised sharp retaliation both directly through raising the level of existing tariffs on all exports from the United States — notably farm products like soybeans — and by making it harder for U.S. firms to do business in the country and potentially limiting U.S. access to rare earth minerals used in a range of high-tech and defense industry products.

Trump’s move on Mexico raises uncertainty for businesses considering investments and clouds the outlook for corporate profits and stock prices, investors said. “This is just the latest worry to put on the fire for investors. The big question at the end of the day, though, is can we really fight two trade wars at the same time?” said Ryan Detrick, senior market strategist for LPL Financial, in a note to clients Friday.

The potential impact from the proposed Mexican tariffs would extend well beyond automakers.

U.S. kitchens and cupboards could also take a huge hit from an across-the-board tariff. The tariff cuts made possible by NAFTA opened the U.S. border to Mexico’s year-round growing season and a cheap supply of produce. Nearly half the fruits and vegetables the U.S. imports come from Mexico, according to Commerce Department data. It could also hit oil imports. The U.S. imported over $14 billion in crude oil from Mexico last year. Oil prices suffered their worst monthly decline in six months as the trade disputes threatened global growth and thus raised questions about demand for fuel.

U.S. produce importers said Americans could pay an extra $3 billion for avocados, tomatoes, mangoes and other fruits and vegetables if the tariff goes up to 25 percent.

“This is a tax on healthy diets, plain and simple,” said Lance Jungmeyer, president of the Fresh Produce Association of the Americas, an Arizona-based group that represents companies that import and transport produce from Mexico.

But the pain doesn’t stop in the produce section. Nearly a third of sugar imported into the U.S. comes from Mexico, and a cost increase could send a price shock through food and beverage supply chains. The U.S. meat industry imported more than $840 million worth of live animals, primarily cattle to fatten and slaughter for U.S. consumers.

U.S. pork producers are already reeling from retaliatory tariffs Mexico only recently lifted after Trump agreed to drop steel and aluminum tariffs to ease passage of his new NAFTA deal.

“Over the last year, trade disputes with Mexico and China have cost hard-working U.S. pork producers and their families approximately $2.5 billion,” the National Pork Producers Council President David Herring said in a statement.

Rather than Trump opening a new front in his global trade war, U.S. farmers and ranchers desperately want ratification of Trump’s NAFTA replacement deal. The renegotiation of America’s largest trade deal has caused nearly two years of anxiety among U.S. producers over future access to their two largest export markets.

Business groups on Friday also once again rejected claims made by Trump that other countries pay the cost of tariffs he imposes. “A 5 percent increase is noticeable and will hit people’s pocketbooks,” said the U.S. Chamber's Bradley.

“There’s no money coming from Mexico,” he said. “Every dime of the tariff is going to be paid by an American consumer and an American business.”

The overall impact of across-the-board tariffs with Mexico, coupled with the reaction in financial markets and fear over the escalating tariff battle, has economists warning more strongly about a potential slowdown. The economy grew at a 3.1 percent annual pace in the first quarter, but forecasts made before the Mexico announcement mostly predict growth of 2 percent or less in the second quarter. And they would likely go lower if Trump follows through and Mexico responds.

“If this is implemented fully, then the probability of a recession has increased significantly,” said Deutsche Bank's Slok.