Going hog wild with tariffs, 72-year-old President Donald Trump threatened to slap tariffs on Mexico due to frustration over Central American immigrants crossing their territory to the United States. Trump’s already in quicksand with China, embroiled in a trade war over longstanding trade imbalances with Communist China. While most economists believe the trade war with China is counterproductive, slapping Mexico with tariffs because of immigration problems goes over the top. Tariff authority has nothing to do with humanitarian issues but rather is used as a balancing tool to equalize trade imbalances. China’s $500 billion trade imbalance with the U.S. isn’t all that much when you consider U.S. companies, like Apple Inc., use China as a cheap labor market to maximize the biggest profits in corporate history. Yet Trump rails against China for violating U.S. patent and copyright laws.
With the yield curve inverting, Trump should read the tealeaves that the U.S. is heading into a slowdown, possibly recession in the near future. At the last Federal Reserve Open Market Committee meeting May 1, Fed Chairman Jerome Powell left the federal funds rate unchanged, signaling a slowing economy. If things get worse by the Fed’s June 12 meeting, Powell could cut the federal funds rate by 25 basis points. Wall Street becomes the best barometer of future economy growth, shedding about 1,000 points in May, leaving the Dow Jones Industrial Average May 31 at 28,015, shedding 355 points. Mexico’s President Andres Manuel Lopez Obrador insisted Mexico was “doing its job” restraining, within its means, Central American refugees. Trump already faces retaliation from China on raising $200 billion in more tariffs on Chinese imports taking effect this month.
Given the 10-year treasury bill ended 2.14% Friday while the 1-year treasury at 2.25%. Trump better think twice before making a bad situation worse. Hoping to get reelected in 2020, the economy better not sink into recession, given Trump’s boasts of having the best economy in U.S. history. Whatever the trade war with China, there’s no logic to slapping Mexico with tariffs, jeopardizing the U.S.-Mexico-Canada Free Trade Agreement. “No good can come of coercive measures . . . These [tariffs] would not be good for Mexicans, but they would not be for American either,” Lopez Obrador said. Sending Foreign Minister Marcelo Ebard to Washington, Obrador hopes to talk some sense into Trump and his chief economic advisors. Director of the Office of Trade and Manufacturing Policy. 69-year-old formerly U.C. Irvine economist Peter Navarro has been Trump’s tariff architect.
Trump’s recent tweets sound more like campaign stump speeches than any coherent economic policy. “Mexico must take back their country from the drug lords and cartels. The Tariff is about stopping drugs as well as illegals,” Trump tweeted. No one expects Mexico to fix all its problems overnight, especially under the threat of tariffs. “We maintain an ongoing dialogue and close cooperation with Mexico on a wide range of issues, including border security efforts,” said State Department spokeswoman Trump’s Mexico tariff announcement caused Wall Street to sell off 1.41% or 354 points, the tech-rich Nasdaq losing 114 points or 1.51%. With the S&P 500 losing 38 points or 1.31%, Trump’s flirting with a slide that could sabotage U.S. Gross Domestic Product [GDP] growth, pushing the economy into recession. House Speaker Nancy Pelosi (D-Calif.) slammed Trump’s Mexico tariffs as “reckless.”
U.S. Chamber of Commerce warned that a 5% tariff on Mexican imports, totaling $346.5 billion in 2018, could cost U.S. consumers $17 billion in higher prices. Trump’s Treasury Secretary Steve Mnuchin and U.S. Trade Representative Robert Lighthizer opposed Trump’s tariff plan, especially given he’s trying to ratify a new North American Free Trade Agreement. “This is a misuse of presidential tariff authority and counter to congressional intent,” said Senate Finance Committee Chairman Chuck Grassley (R-Iowa), opposed to Trump’s plan. Lopez Obrador said Mexico is doing everything possible within humanitarian guidelines to restrain the flow of immigrants from Central America. “We are doing our job, without violation [immigrant’] human rights,” Lopez Ogrador said. Using the tariff authority to punish Mexico for an ongoing humanitarian makes no sense economically.
Before Trump kills the Golden Goose, he needs to reconsider applying tariffs to Mexico for its humanitarian immigrant crisis. Watching the yield curve invert and stock market sell off show how fragile the U.S. economy, still recovering from the 2008 Great Recession. If Trump wants to keep GDP growing, Wall Street needs to be on board, with the nation’s major funds buying shares, not dumping them. When Trump meets with Chinese President Xi Jinping at the G20 in Osaka, Japan June 28, he’d better resolve the current Trade War or face the very real prospect of recession, with all its political implications for 2020. Whatever game of chicken Trump played with China, it’s now time to end the uncertainty and strike a deal that works for both countries. More talk of tariffs in China or elsewhere only scares traders into selling off, pushing the economy into recession.
