Mexico: Tariffs as the Economic Alamo
The potential trade clash with Mexico could be further compounded by deportation tension that brings additional tariff threats emanating from that policy priority.
This is not my first Alamo…but Davey, that is a lot of imports…
We were getting ready for the tariff hammer to come down, but only Trump can get his tariff policy in a headline countdown before he is even certified and inaugurated (Jan 20). The debate around the facts and concepts of tariffs are tricky when so many ignore the former (facts) and thus by definition fail to grasp the latter (concepts). Some ignore the facts by design (intent) and reverse engineer the conclusion (i.e. mislead or lie) for their own purposes. We looked at the Canada issues earlier today (see Tariff: Target Updates – Canada 11-26-24) after earlier looking at the tariff and trade issues ahead of the election (see links at bottom). In this note, we break out the Mexico import/export checklist.
The three largest trade partners – Mexico at #1, Canada at #2, and China at # 3 – are in the crosshairs for the tariffs, so this is not a gradual start by Trump to say the least (technically he has no legal authority yet). Of all the potential clashes, a major trade battle with Mexico has been the most likely as we have covered in past commentaries (Trump at Economic Club of Chicago: Thoughts on Autos 10-17-24).
The ancestral NAFTA supplier chain is the biggest risk with the “labor arb” in Mexico and immigration issues with Mexico serving as the main structural problem. Autos draw the most headlines given supplier chain and assembly investment that has cost OEMs and suppliers billions and were decades in the making. The tech and computer manufacturers also have run major operations for decades as highlighted in the #2 ranking on the import list.
Mexico will see life get that much harder when deportation heats up. The potential for a political firestorm is already clear enough with Mexico and the sharp response of a new President, Claudia Sheinbaum. The implied threat of tariff retaliation and less-than-subtle accusation that the US arms Mexico’s bad guys underscore that Trump facing off with a strong woman could get tricky.
The domestic political realities will factor into any response, and leaders in Mexico and Canada cannot look weak. Canada rolls into an election year in 2025. As an aside, a blustering right wing tattooed politician challenged Trudeau to a boxing match. Trudeau kicked his ass (I watched it).
The above chart updates the imports from Mexico by major product lines. As many retailers have already been out discussing in the latest earnings season, the “where” of sourcing is now a major risk factor depending on the mix of nations in the supplier chain. China and Mexico are high on the list for many. That gets many companies across services (notably retail as a major employer and real estate counterparty) into panic mode and the same for manufacturers with extended global supplier chains. Autos are near the top of the list as everyone starts worrying about a game of target nation roulette as Trump gets rolling. GM is the most exposed as we covered in an earlier commentary (see Trump at Economic Club of Chicago: Thoughts on Autos 10-17-24).
A scan of the above list shows the products that are teed up for 25% tariffs with autos, commercial trucks, computers, electronics equipment, audio and video equipment, etc., that have “cheap labor” written all over them. There are a lot of “round trip” products that also flag the critical working capital management systems rolled into place over decades. We have covered many of the topics in the past and there will be no shortage of follow-up in 4Q24 earnings season as management team get pressed for transparency.
This gets everyone into the guessing game around the all-caps word “ALL” sent out by Trump as his way of announcing his initial tariff plan on Truth Social. History shows that “not ALLS are created equal.” Supplier chain managers will seek to find a path to exemptions for their key supply needs. This feeds the school of thought that lobbying for exemptions will combine the best of strategic priority assessment and industrial planning with the worst of corruption and influence peddling. Sort of a “Boss Tweed meets supplier chain dictator” exercise (about those PAC contributions…).
The above chart is the retaliation list, and trade partners will retaliate with ag and food always at the top of the list. To the extent that NAFTA/USMCA totally breaks down, China trade deals will start to look a little better to Mexico for more support as they seek to explore global relationships and look for more allies.
Glenn Reynolds, CFA glenn@macro4micro.com
Kevin Chun, CFA kevin@macro4micro.com
See also:
Tariff: Target Updates – Canada 11-26-24
Tariffs: The EU Meets the New World…Again…Maybe 10-29-24
Trump, Trade, and Tariffs: Northern Exposure, Canada Risk 10-25-24
Trump at Economic Club of Chicago: Thoughts on Autos 10-17-24
Tariffs: Questions that Won’t Get Asked by Debate Moderators 9-10-24
Facts Matter: China Syndrome on Trade 9-10-24
Trade Flows: More Clarity Needed to Handicap Major Trade Risks 6-12-24
Trade Flows 2023: Trade Partners, Imports/Exports, and Deficits in a Troubled World 2-10-24
Trade Flows: Deficits, Tariffs, and China Risk 10-11-23