Fears of a Recession Grow as President Trump Wages Trade Wars with Mexico and China

Stocks Suffer Worst May Since 2010

President Donald Trump shocked global markets when he tweeted that he would hit Mexico with a 5% tariff on all imports into the U.S. on June 10. The unexpected announcement comes at a time when North American markets are already reeling from a U.S. trade war with China. A new trade war with Mexico also puts the new NAFTA deal is serious jeopardy. This sent North American stocks tumbling, capping the worst May since 2010.

Late on Thursday May 30, President Trump tweeted that he would impose a 5% tariff on all goods coming into the U.S. from Mexico until illegal immigration from Mexico into the U.S. is remedied. He later said that the tariffs would increase by 5% a month to a maximum of 25% by October, essentially matching what the U.S. is hitting China with. Trump said the tariffs will remain in place until Mexico “substantially stocks the illegal inflow of aliens coming through its territory.”

Fears of U.S. trade wars on two fronts and a global economic slowdown helped stocks cement the worst May since 2010.

On Friday, May 31, the Dow Jones Industrial Average capped its sixth straight losing week, the longest downtrend since June 2011. The S&P 500 lost 6.5% of its value, giving up all its gains since early March. The TSX meanwhile, was down 3.2% in May. The Mexican peso meanwhile tumbled more than 2% and the loonie fell below $0.74 U.S. In Canada, energy shares were hit when oil prices slipped more than 2%.

Industries Hurt by a Trade War with Mexico

What would a U.S. trade war with Mexico look like? For one, it would cobble the auto industry. Mexico is the largest source of U.S. auto imports. In addition to the auto industry, Mexico is a major supply chain for Walmart (NYSE:WMT). Making products 25% more expensive would mean increased costs for manufacturers and consumers.

It will also have a major impact on many big Canadian companies that have significant operations in Mexico as well. Canadian manufacturers that could be caught in the crossfire include Magna International (TSX:MG)(NYSE:MGA), Linamar Corp. (TSX:LNR), and Bombardier (TSX:BBD).

A trade war with Mexico also puts the new Canada-Mexico-U.S. Agreement (CAMUS) in jeopardy. It would also wreak havoc on U.S. jobs and the broader economy. According to the U.S. Chamber of Commerce, trade with Canada and Mexico supports 14 million U.S jobs.¹

Trump’s tariff tweets came on the same day the President asked Congress to pass the renegotiated version of NAFTA. While President Trump may say his plan to increase tariffs on Mexico has nothing to do with the passing of CAMUS, it certainly won’t make Mexico want to pass the new trade agreement.

With CAMUS in jeopardy and the trade war with China reaching a boiling point, there is genuine concern that the global economy will cool.

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Sources:

1. “NAFTA Works for America,” U.S. Chamber of Commerce, last accessed June 3, 2019; https://www.uschamber.com/nafta-works.

Photo Credit: iStock.com/twinsterphoto