President Trump decided to open up yet another front in his trade war, this time turning his sights on Mexico.
Trump took to twitter on Thursday to announce a 5 percent tariff on all goods coming from Mexico would take effect on June 10. The tariff would then rise by 5 percent each month until Mexico cut off illegal immigration, with tariffs topping out at 25 percent by October. Trump said the tariffs come in response to illegal immigration.
Administration officials said that they would “judge success” on a “day-to-day, week-to-week basis,” offering only subjective criteria such as cutting the flow of migration “substantially.”
In an earlier era, the announcement could be interpreted as a tough-talking negotiating tactic, but after Trump abruptly announced a hike of tariffs on China a few weeks ago, the markets are now taking him at his word. Financial markets were rattled on Friday, with stocks and bonds gyrating on the news. The Dow Jones Industrial Average fell more than 300 points.
The U.S. and the Mexican economies are very much intertwined, and the tariffs would be acutely felt by American consumers. The tariffs would also batter the auto industry, which has supply chains spread across North America. The global auto industry is already suffering from weak sales and job cuts. GM and Ford saw their share prices sink by more than 3 percent in early trading on Friday.
Complicating matters further, the tariffs would severely diminish the odds that the renegotiated NAFTA agreement, known as the USMCA, would be ratified. The three countries agreed to the treaty last year, but it needs to be ratified in all three national legislatures.
The tariffs come at a particularly bad time. Fears about slowing global growth are rising, with signs of an economic slowdown mounting. The U.S.-China trade war, which only seems to be escalating, is dragging down growth. Morgan Stanley said that the U.S. economy is on “recession watch.”
Crude oil was already heading for the largest monthly decline in six months. Trump made sure that oil benchmarks closed out the month of May on a negative note. In early trading on Friday, WTI and Brent were each off more than 2 percent, with WTI back in the mid-$50s and Brent plunging to the low $60s.
The tariffs would impact an energy trade flow from Mexico to the U.S. that last year reached $13 billion, according to Argus Media, including 665,000 bpd of crude oil and 53,500 bpd of refined products imports.
It’s unclear how Mexico will respond, but could simply enact retaliatory tariffs, as China has done. Mexico imported $265 billion worth of goods in 2018, including $34 billion of crude and petroleum products and $18 billion of plastics, according to Argus.
A new U.S.-Mexico trade war would drag down an oil market that was already heading in a negative direction. “Oil prices have weakened on rising fears that protectionist trade policies will reduce demand, and following a month of consistent speculative net selling,” Standard Chartered wrote in a note. “Data has been weak across the board, from bottom-up oil-market data through to top-down macroeconomic indicators.”
The investment bank went on: “The latest global oil demand readings have also been negative.
We estimate that global demand fell y/y in March, with weak demand across the OECD and a particularly marked slump in Europe.”
While supply outages have hit Venezuela and Iran, and potentially Libya, the trade war could affect the entire global economy. As such, the downside risks to oil from weak demand are of greater significance than the upside risk from supply outages, according to Standard Chartered.
However, at the same time, the low prices likely ensure that OPEC+ will extend the production cuts for the rest of the year. They will also put the squeeze on U.S. shale drillers. “[W]e think prices are low enough to both delay and moderate increases in Saudi Arabia’s output, and will also increase financial pressure on US oil companies to scale back activity even further,” Standard Chartered concluded.
By Nick Cunningham of Oilprice.com
