Trump’s stunning decision to escalate trade wars with China and Mexico signals a turning point for U.S. policy

President Trump’s plan to slap new tariffs on Mexican imports, weeks after escalating his trade war with China, leaves the United States fighting a multi-front campaign that threatens more instability for manufacturers, consumers and the global economy.

The president’s bombshell announcement that he would impose 5 percent tariffs on Mexican imports, with the possibility of raising them to 25 percent if Mexico doesn’t stop migrants from crossing into the United States, left some economists fearing there were few limits to Trump’s appetite for trade conflict.

“In our view, if the U.S. is willing to impose tariff and non-tariff barriers on China and Mexico, then the bar for tariffs on other important U.S. trading partners, including Europe, may be lower than we previously thought,” Barclays economists said in a research note. “We think trade tensions could escalate further before they de-escalate,” Barclays added.

Adam Posen, president of the Peterson Institute for International Economics, called Trump’s move against Mexico a turning point for financial markets and the U.S. economy.

In global markets Friday, investors spooked by new tariff threats sought safety in German government bonds and the Euro rather than their customary dollar-denominated havens. This “seems to me an indicator that the concerns about the U.S. are rising,” Posen said.

The president’s latest move rocked business leaders who were already scrambling to reshape supply chains to avoid fallout from the U.S. confrontation with China. The added uncertainty may paralyze executives who can’t be sure their next supply chain location will be any safer than their last.

“A lot of companies feeling pressure to get out of China are looking at Mexico if they want to serve the US market, Vietnam if they’re more focused on Asia,” said William Reinsch, a former Commerce Department trade official. “Trump’s action yesterday scrambles all those plans.”

In one example of a company caught in the crossfire, GoPro of San Mateo, Calif., last month announced it would move manufacturing of some of its cameras from China to Mexico, so that it could stop paying tariffs to import them to the United States — tariffs resulting from the U.S. trade war with China. Weeks later, GoPro now faces new tariffs to import those goods from Mexico. The company declined to comment Friday.

As U.S. companies race to find new tariff-free places to manufacture, so far few have reported returning production to the United States, despite the president’s stated aim of using trade policy to help bring jobs back home. Many are still seeking alternative locations overseas, where labor is cheaper.

Trump said he would impose the new tariffs because the Mexican government wasn’t doing enough to stem the flow of migrants, many of whom travel through Mexico from Central America. Some White House officials who support Trump’s approach believe the threat of tariffs is the only way to get the attention of Mexican leaders.

The Mexican government tried to defuse the tension Friday, saying the two sides would meet in Washington on Wednesday for high-level talks.

If no solution is found, Mexico is certain to impose retaliatory tariffs on U.S. goods, with likely targets including U.S. pork, beef, wheat and dairy products, said Former Mexican diplomat Jorge Guajardo.

Some prominent Republicans, including Senate Finance Chairman Charles E. Grassley, raised concerns that the new tariffs could threaten a trade agreement the Trump administration clinched only months ago with Mexico and Canada, to replace the 1994 North American Free Trade Agreement.

Others said the about-face treatment of Mexico would damage Trump’s ability to negotiate trade deals it is pursuing with other partners, including China and Europe.

“You can’t negotiate a trade agreement with someone and then turn around and whack them,” said Douglas Holtz-Eakin, a Republican economist and former Congressional Budget Office director.

In late March, Trump threatened to shut the entire southern border to curb illegal immigration, but backed down a week later after an outcry. That has left some wondering how seriously they should take the latest tariff threat.

If Trump follows through with new tariffs on Mexico, it would hurt U.S. economic growth and increase the possibility of the Federal Reserve reversing course and cutting interest rates this year, economists said.

The drag to the US economy could be meaningful, especially if the tariffs reach 25%,” the upper limit that Trump has set, Bank of America Merrill Lynch economists wrote Friday. Even if the tariff remains at 5 percent, the effective cost could be higher because many parts cross the border several times as products are assembled, and the tariff must be paid upon each crossing into the United States.

U.S. automakers will be among the principal casualties. Last year, the United States imported roughly $350 billion in merchandise from Mexico, including about $85 billion in vehicles and parts, according to the International Trade Administration.

A full 25 percent tax “would cripple the industry and cause major uncertainty,” according to Deutsche Bank Securities.

“The auto sector – and the 10 million jobs it supports – relies upon the North American supply chain and cross border commerce to remain globally competitive,” said Dave Schwietert, interim president of the Auto Alliance, an industry group. “This is especially true with auto parts which can cross the U.S. border multiple times before final assembly.”

“Widely applied tariffs on goods from Mexico will raise the price of motor vehicle parts, cars, trucks, and commercial vehicles – and consumer goods in general — for American consumers,” the industry group said. “The potential ripple effects of the proposed Mexican tariffs on the U.S. North American and global trade efforts could be devastating.”

Consumers could pay up to $1,300 more per vehicle if the tariffs are implemented, according to Torsten Slok, chief economist for Deutsche Bank Securities.

Retailers, technology companies and textile manufacturers also will be hurt. U.S. mills now ship yarn and fabric to Mexico, where it is turned into apparel and exported back to American retailers. Last year, the U.S. textile industry exported $4.7 billion in yarn and fabrics to Mexico, its largest single market.

“Adding tariffs to Mexican apparel imports, which largely contain U.S. textile inputs, would significantly disrupt this industry and jeopardize jobs on both sides of the border,” said Kim Glas, president of the National Council of Textile Organizations.

The new dispute with Mexico came as the U.S.-China trade conflict continued to deepen.

China on Friday announced it would establish a blacklist of “unreliable” foreign companies and organizations, effectively forcing companies around the world to choose whether they would side with Beijing or Washington.

The new “unreliable entities list” would punish organizations and individuals that harm the interests of Chinese companies, Chinese state media reported, without detailing which companies will be named in the list or what the punishment will entail.

Chinese reports suggested the Commerce Ministry will target foreign companies and groups that abandoned Chinese telecom giant Huawei after the Trump administration added Huawei to a trade blacklist this month, which prohibited the sale of U.S. technology to the Chinese company.

At a time when Western corporations have cut back executive travel to China after authorities detained two Canadians on national security grounds in December, the new blacklist sent another shock wave through the business community.

“I think foreign and especially U.S. firms now have to worry that China is creating a new ‘legal pretext’ to at least impose exit bans on foreign individuals who make this new list, if not worse,” said Bill Bishop, the editor of the Sinocism newsletter, referring to the Chinese practice of not allowing designated foreigners to leave China.

Aside from the new blacklist, China in recently days also escalated threats to stop selling the U.S. so-called rare earths — 17 elements with exotic names like cerium, yttrium and lanthanum that are found in magnets, alloys and fuel cells and are used to make advanced missiles, smartphones and jet engines.

Analysts said it could take years for the United States to ramp up rare-earths production, after its domestic industry practically disappeared in the 1990s. Roughly 80 percent of U.S. imports of the material come from China, according to the United States Geological Survey.

The People’s Daily, the Communist Party’s official mouthpiece, carried a stark warning for the United States this week in an editorial about rare earths: “Don’t say we didn’t warn you.”

That commentary surprised China experts because the People’s Daily, which often signals official positions with subtly codified language, uses that phrase sparingly: It famously appeared before China launched border attacks against India in 1962 and Vietnam in 1979.

Trump’s Trouble in the Farm Belt

This means the trade fight has cost U.S. farmers a bundle when they least can afford it. In 2017 U.S. farmers sent 25%—some $140 billion—of production abroad. More than 17% went to China. But then the U.S. imposed tariffs against Chinese products, and Beijing retaliated with sizable tariffs on 90% of U.S. farm exports. American Farm Bureau Federation President Zippy Duvall says that “in 2018, U.S. agricultural exports to China declined $10 billion—about a 50 percent loss.”

China was once the second largest export market for U.S. agriculture but it’s now fourth. “This is a drastic reversal for what had been a growing market,” wrote Mr. Duvall in a recent letter to the President. “From 2000 through 2017, the value of our agricultural exports to China grew from 2 percent to 16 percent of total U.S. agricultural exports.”

American soybean farmers sent about 60% of their exports to China in 2017. But their Brazilian competitors pay a 3% Chinese tariff while Americans now pay 28%. In 2018 U.S. soybean exports to China fell 75%, and U.S. farmers had to cut prices to unload oversupply in other markets. The total value of soy exports fell $4.3 billion—a 20% decline.

Or consider pork exports, 40% of which has traditionally gone to Mexico and China. U.S. pork exports by volume to China dropped 58% in September 2018 from a year earlier and 80% since 2016. Mexico’s 20% tariff on U.S. pork exports, in retaliation for Mr. Trump’s steel tariffs, cost the pork industry an estimated $1.5 billion in 2018.

None of this comes as a surprise to Mr. Trump, who has been hearing complaints for months from his Farm Belt supporters. That’s why Mr. Trump is responding with the $16 billion in subsidies, most of which will be direct payments to farmers. These are in addition to the subsidies under traditional U.S. farm programs.

So in order to make up for losses from trade, Mr. Trump is dunning other American taxpayers. But as Bill Gordon, vice-president of the American Soybean Association, recently told the South China Morning Post, farmers don’t want welfare. “Here’s a handout to make you happy? That doesn’t make us happy. We want our markets back,” Mr. Gordon said.

The argument for enduring this pain is that it is the price of getting China to change its predatory trade practices. Short-term pain for some will lead to long-term gain for everyone. The game theory is that Mr. Trump has to show China’s Xi Jinping that he is willing to absorb more pain for longer than Mr. Xi can. But then the pain is in Kansas, not Washington.

Not long ago Mr. Trump said he wanted a China trade deal but lately he’s been suggesting he’d be as happy running for re-election in 2020 as the trade hawk who was willing to take on China. We wonder how Iowans will feel about that if farm incomes continue to decline for another 18 months.

To China, All’s Fair in Love and Trade Wars

The standard line from President Donald Trump and those who support his get-tough approach toward Beijing is that because China sells more to the U.S. than the other way around, Washington has the upper hand in its game of tariffs. “China buys MUCH less from us than we buy from them,” Trump recently tweeted, “so we are in a fantastic position.”

The intrusive Chinese state has all sorts of levers to control the economy and society, and in an environment that lacks rule of law, officials can pull them at their pleasure. They also have far more targets to aim at than the trade data suggest. Many American companies have substantial operations within China that are tremendously important to their bottom lines. General Motors and its partners, for instance, sold more than 3.6 million vehicles in China last year, almost all of them manufactured locally. Starbucks operates more coffee shops in China than in any other market aside from the United States. These businesses are vulnerable to government-inspired nefariousness, from product boycotts and state-press smear campaigns to regulatory investigations

The Chinese have employed such tactics in the past. In 2017, for instance, China’s government waged an undeclared war against South Korean business over a dispute regarding an American missile-defense system. When Seoul rebuffed Beijing’s demands that it cease deployment of the system—which the Chinese considered a threat to their security—China tried to compel the South Koreans by pressuring their companies and economic interests.

A primary target was Lotte, a Korean conglomerate with interests in candy, hotels, retail, and other businesses. Lotte committed the crime of providing land for the missile system. The Chinese government whipped up nationalist ire against the company through the state-controlled media. One op-ed in the Global Times, a newspaper run by the Communist Party, entitled “Lotte’s Development in China Should Come to an End,” thundered that “showing Lotte the door will be an effective warning to all the other foreign forces that jeopardize China’s national interests.” Protests erupted in front of supermarkets owned by the Korean group, while inspectors ordered outlets closed after supposed violations. Sales plummeted, and Lotte eventually exited from the business. That wasn’t all. Chinese shoppers also shied away from Korean-branded cars and cosmetics. Korean pop stars were denied entry visas; group tours to Seoul for big-spending Chinese travelers were canceled.

Canada is enduring such treatment right now. Angered that Canadian authorities (at the behest of Washington) arrested the chief financial officer of the Chinese telecom giant Huawei Technologies, Beijing blocked Canada’s exports of pork and canola, pinching the country’s agricultural sector. China has taken this step even though it isn’t in its own economic interest, since its domestic pork industry has been ravaged by swine flu. Similarly, in 2012, Chinese quarantine officers began impounding Philippine bananas amid a flare-up over contested claims in the South China Sea.

 

Just the Fear of a Trade War Is Straining the Global Economy

The Trump administration portrays its confrontational stance as a means of forcing multinational companies to bring factory production back to American shores. Mr. Trump has described trade wars as “easy to win” while vowing to rebalance the United States’ trade deficits with major economies like China and Germany.

Mr. Trump’s offensive may yet prove to be a negotiating tactic that threatens economic pain to force deals, rather than a move to a full-blown trade war. Americans appear to be better insulated than most from the consequences of trade hostilities. As a large economy in relatively strong shape, the United States can find domestic buyers for its goods and services when export opportunities shrink.

.. Before most trade measures fully take effect, businesses are already grappling with the consequences — threats to their supplies, uncertainty over the terms of trade and gnawing fear about what comes next.

..  Christine Lagarde, warned this past week about trade conflicts. “It would be serious, not only if the United States took action, but especially if other countries were to retaliate, notably those who would be most affected, such as Canada, Europe and Germany.”
.. The Trump administration’s decision to reinstate sanctions on Iran has lifted oil prices, adding pressure to importers worldwide.
..  Europe’s economy is weakening, with Germany — the continent’s largest economy — especially vulnerable.
.. Across Europe, steel makers fret about an indirect consequence of Mr. Trump’s tariffs — cheap Chinese steel previously destined for the United States, now redirected to their continent.
.. Mr. Trump portrays trade hostilities as a necessary corrective to the United States’ trade deficits with other nations. But economists and business leaders note that many imports are components that are used to manufacture goods at American factories.
.. Electrolux, the Swedish manufacturer of household appliances, recently postponed plans to upgrade a stove factory in Tennessee, citing uncertainties created by the tariffs.
.. Under Nafta, Mexico has grown into the world’s largest importer of American apples. But sales are down because the price has gone up by nearly one-fifth in the past week alone.
.. Chinese pork producers have turned their sights to Brazil and Argentina, the only countries that now produce enough soybeans to offer a potential alternative to the American supply.