Trump Tariffs Imperil Mexico Relationship: Duncan Wood

quote decisive measures to stem migrants entering the US. To get a sense of what this means for the US Mexican relationship, returned to Duncan Wood. Duncan is director of the Mexico Institute at the Wilson Center based in Washington, d C. Duncan, thank you so much for joining us. I guess let's start off with just a sense of how significant is this move by President Trump to impose these tariffs potentially. I think it's hugely significant, um in

the sense, well in two senses. First of all, what's going to mean for the bilateral relationship and for the generally positive two relations that have existed so far between Trump and President Lopoes or Ador in Mexico. And secondly, I think it's hugely significant in terms of domestic politics here in the United States. Um, this is going to have broad, far reaching and perhaps unpredicted UH consequences for

for the election in so Duncan. President Trump said that if he imposes her up, some Mexico companies will leave that country to avoid paying them. Do you agree. I actually don't think that that's that's the case, at least

in the short term. I think that what we're going to see is we're going to see a rather vigorous response from the Mexican government retaliatory tariffs which will hit United States agricultural exporters in particular, and that will bring first of all, the the US Senate to pressure the president. And secondly, I think the President is going to have

to accept that this may be in fact counterproductive. But you know, one of the things that Exco has going for it right now is that Mexico is often seen as being an alternative to China in terms of producing for export to the United States due to the trade tensions that exist between the US and China. Right now,

Mexico has been benefiting enormously. If these tariffs are applied in the you know, not just in a short term way, but in the long term as a long term measure, then I think we're going to see that that will obviously compromise Mexican competitiveness, but to try to delink the Mexican and US economies at this point in time, where we see a North American manufacturing platform that is highly integrated supply chains that have been built up over a

period of thirty years, it's just unreasonable to think that that's going to be the case. And in many areas of the of the U S economy, we're going to see prices going up for US goods that depend upon imports of parts from Mexico. And that's going to compromise not just the h the consumers in here in the United States who are going to pay more for their goods, but it's also going to compromise the competitiveness of American

firms as they try to compete in the global economy. So, Duncan, one of the questions is, you know, for will these teriffs move Mexico to act as a president once do you think they will be effective? There's a serious problem in the logic here, and that is that Mexico could do more if it wanted to. Mexico is already doing an enormous amount. Between January and March of this year, Mexico has been deporting ever increasing numbers of Central Americans.

So between January and March of this year, they deported around twenty two thousand Central Americans from Mexican territory. If we look back over the last five years, Mexico has deported more Central Americans from Mexican territory than the US has from US territory. So Mexico is already doing a lot. Secondly, Mexico does not have scare spare resources to apply to this these kind of programs, and the United States is

not offering any and of aid in the past. I mean, particularly if we go back to two thousand and fourteen, when the United States pressured Mexico to implement something called the Plan Fronterra sor or the or their Southern Border Plan. The United States provided enormous amounts of financial, um logistical and technical aid to enable them to do that. This is just a cold demand on the part of of

President Trump that the Mexicans can do more. Mexico is already in um a period of fiscal austerity they called actually republican austerity there, and the president is desperately trying to to to balance his budget, so there's not a lot of spare resources available. So I don't see how they could possibly do more. And here's the problem is that, in fact, it may result in less willingness on the part of the Mexican government to continue collaborating with the

United States. So, duncan, I'm trying to understand the legality of putting these tariffs on goods coming from Mexico given the current trade agreement in place, because President Trump is not doing it for that, he's saying he's doing it because of what he's basically for the immigration issues. Does this sort of violate any provisions within the existing agreements?

So um, the President has powers under under U S Law to enact economic measures for reasons of a natural national emergency, and so that's really what he's that's the justification that he's using here. Mexico will say that this is actually a violation of the NAFTA. There's also a violation of w t O law, and Mexico will use that as their justification for enacting retaliatory tariffs. UM. Now the United States will president will say that he is

justified according to US law. But we've already heard Senator Chuck grass Lee come out and say that he believes that the President has exceeded his powers here. So this will clearly become a congressional fight as well. And that's where I see that the President is probably going to

find that he's on on on week or on firm ground. UM. And particularly we see pressure mounting up in rural constituencies, amongst amongst farmers in particular, a constituency that he desperately needs for his re election bid in twenty duncan Ultimately, what do you think this trade issue, these tariff issue, what effect will have on this U S m c A deal, the greater broader deal. Well, it it muddies the waters here in the United States because it's just

another issue. I mean, we had just got rid of Section to thirty two tariffs on aluminum steel that was seen as being a major sticking point to getting Canada and Mexico to ratify the treaty from their From their end, we know that there is enormous tension between the White House and Speaker Pelosi, and Speaker Pelosi seems very reluctant to move ahead at this point with a ratification process

here in the United States UM. And now with these measures, I think we're just going to see that in Mexico the Congress which had begun considering UM the U. S. M. C Adrian Agreement there, which is has the status of a treaty in Mexico, it is not just an agreement, is actually a treaty. They call it the Mexico United States Canada Treaty, their t mech UM that requires approval

by the Mexican Senate. And whilst there was generally a positive attitude towards ratification after the repeal of the Section two tariffs, now I can see that this is going to generate a backlash there and a lot of people within the Mexican political system. We're going to say, why would we sign a free trade deal with a partner that is going to continually find another excuse to punish US UM using tariffs for things over which we have very little control. Duncan would thank you so much for

being with us and breaking it down. Duncan Wood, director of the Mexico Institute at the Wilson Center in Washington, d C. Well, Lisa, I have to admit that I was not aware how many cars and car parts we import from Mexico. But it's a lot, like a real lot. So it al us explained how big it is. We welcome Alan Baum. He's a principal, that's a technico cf a term. Alan Baun principle from Bauman Associates. He joins us from West Bloomfield, Michigan. So I'm sure he knows

a thing or two about cars. So Alan, just give us some history as to why Mexico is such a big supplier of autos to the U. S Well. The the obvious one, of course is cost, the lower cost of labor, but it's also trade, and of course in this case it's trade, not the way the President is talking about it, but the Mexican trade laws with the

rest of the world. They have a lot of no tariff agreements, and so companies from Japan, from Germany, from Korea, uh flock as well as of course the US flock to Mexico in order to provide vehicles not just to North America but to the world. So one thing I'm I'm struggling to understand. Could Forward and General Motors both of their shares Downgental Motors four point three percent to

climb this morning? Could they just shift their supply chains out of Mexico, avoid the tariffs, avoid the political fallout, Uh, and you know, perhaps increased costs a bit, but immunize themselves from these types of trading certainties. And of course the answer is no. If they could, that would mean they were running extremely inefficient plants, having the capability to move from one plant in one country to another. Uh. The whole system is, of course tied together. Uh. And

even that's even true with their suppliers. Even if they said, Okay, we're gonna stick with the same suppliers because we know those are good companies, but we just want you to move to plants outside of Mexico, again, that would be

very poor management on the part of their supply base. So, Ellen, given what you know about these automakers in the current competitive landscape, how do you think the automakers if these tariffs do go through, and maybe they go through, and maybe the highest levels that the president is proposing, to what extent do you think they will pass along price increases versus you know, trying to eat it in the margin. I mean, how do you think they'll react? Well, As

with any product, it's based upon what the consumer will bear. Uh. And so if we're talking about crossovers and and uh sport utility vehicles and trucks, which are more popular with consumers, perhaps they'll be able to pass some of it along with respect to cars that are a harder sell right now, they're not selling without the tariffs, they wouldn't sell very well with them. UH. So it'll be a case by case decision. And it's also a very short term decision.

You know. The way these tariffs, proposed tariffs are are posited, uh, they would go up uh on a monthly basis. So what you might do uh and this would be very disruptive and very expensive, but you might do it anyway. UH. Normally you have a little bit of a pause in production uh in the summertime, both for UH for for updating your plants. Obviously to give your workers a little bit of a break to do some maintenance. Maybe you

defer all that and you just keep plugging. UH. And July and August are oftentimes when when things slow down when changes are made. Uh. The the even worse situation for general motors. For example, there in the middle of a changeover in Mexico for their new pickup trucks. Uh and uh so they are a little bit down anyway. Uh and they're ramping up. So this couldn't come at a worse time. So if both automakers and suppliers said we're not going to stop in July, we're not going

to stop in August. Uh. There are people jumping out of windows, I'm sure uh in uh in a number of places. Hopefully they're not on a high floor. Um to to try to figure that all out. So Ellen, does anyone benefit from me? I mean I was thinking this morning, perhaps used car values will go up in the wake of this. Is there anything? Is there anyone who's gonna sort of cash in a little Uh? That's

certainly possible. Um And for example, Ford H doesn't import fully built up F one fifties or or super duties from Mexico, whereas f C A and GM do uh their own products obviously, uh So so those are those are slight differences there. Uh. There are some suppliers that perhaps don't have as much of a base in Mexico. Uh. Then there are companies like Matulsa, which is a Mexican based company that supplies North America. Obviously they've got huge issues.

I mean, let's let's carry this forward. We're talking three point nine million vehicles a year built in Mexico, two point six million engines, and one point eight million transmissions. So uh, the question becomes, uh, you know, how does and and these parts go back and forth? Uh? The issue apparently is there's no credit when you export something from the US, but when you bring it back as a fully assembled product, is it is the tariff on

the entire thing? Even more, is this even legal? And I'm not a lawyer, which means I'm not a trade lawyer. But there are side letters in the new U S m c A. Some people believe those great those side letters are already in effect, and those side letters might make these tips illegal. Yeah, obviously we would have to go through a court process for that. Alan Baum, thank you so much for being with us. Great Great Insight Alabama's principle for Baum and Associates, a Michigan based research

firm focused on automotive industries. We're getting more of a sense of how China plans to retaliate against the U S when it comes to the escalating trade tensions, Possible curbs on rare earth exports to the United States in certain key economic areas, and unreliable entities list joining us now to discuss what these mean for a potential trade deal, is Mike McDonald, chief economist for financial products at Bloomberg

here in our a greater active broker studios. How likely is it, Mike there, we're actually gonna get a trade deal at this point? Okay, So it's my view. Uh, you know, I had been optimistic previously on this show. Um, subsequently my baseline, I don't. I don't think we're going to get a deal at this point. Um, I would say being optimistic alright, So what changed for you? So?

I mean I think that you know, when when we first heard, you know, three or four weeks ago, and we all thought there was going to be a deal, we thought that there had been alignment into views, concessions hadn't made, there was going to be signing. I think what actually happened was there was fundamental differences that weren't

being aired. Primarily, Uh, you know, I think from the Chinese perspective, they came in to negotiate a trade deal, and they left the negotiations feeling like they were negotiating terms of surrender and not actually a trade deal. And it seemed like the two sides were immovable in terms

of what they were going to agree on. And I think some of the core points were, um the Chinese that they were going to bend to the will of the US negotiators, and once they signed the deal, the tariffs that were in place, we're going to remain in place until they felt they had accomplished enough to justify the removal of their tariffs. And I think that's something that they were just unwilling to agree with and sign uh. And I don't think the US negotiators were willing to

change their view on that. Uh. And then if you think about I think what happened in Mexico. You know, if you were to ask me that probability question yesterday, maybe I would have gone a little bit higher. But now you have to put yourself in the perspective of the Chinese. So even if they did sign a trade deal, look at what happened with Mexico. So the Chinese are worried that they're going to remain a punching bag of Trump's going into the election. So they have a trade deal, tariffs,

they're gone. All of a sudden, something happens and they get a tweet saying, you know, we're putting tariffs on for a reason. Why, Oh that is actually unrelated to the trade deal that we signed. It's this is punitive for some other action that's taking place. I see. So I guess then if that's if you're as case at this point is that no trade deal will get uh, we'll get we'll get done at this point, then play

out what happens. I mean, the unreliable entities list from China, the rare Earth's curves, the you know, walk us through what this means. Yeah, I mean, I wrote on Bloomberg Opinion, I wrote something over a year ago at this point talking about the potential repercussions of targeting Chinese tech companies, and the repercussions wouldn't just end at tariffs. Uh, it would be China beginning to target US companies that it has some control over, either that do business in China

or have some sort of production in China. So I think this is a step in that direction. Right in the U S. We you know, there's checks and balances and and and certain um processes that have to be followed to go after a company. China is much more command economy, run out of the center. So if there's something they want to pass that restricts a company from doing business in that country, it's a lot easier to do than it would be here. So they have a

lot of they can move quicker on that front. UH. And as you see the UH trade war escalate outside of just tariffs, UH, this is going to continue to progress. And now we've seen actually the trade war go beyond China to also now move to Mexico, who again you know, just had this trade deal agreed with the US, but it didn't seem to matter. Alright, So, Mike, it appears at President Trump and President She are going to meet

at the G twenty coming up. Any reason to have some optimism that if you just put these two in a room, that maybe they can paper over some of these bigger issues here. I mean, it's hard to see that right now. If if you think back to last year, it was a similar meeting that they had in Argentina that kind of kicked the can on the problem. But the differences seem so fundamental. Without one side um seismically

changing their beliefs, it's hard to see a deal. So maybe there's the the can gets kicked a little bit. But I'm not overly optimistic. You know, there's there's a chance something could happen, but you know, I factored that into my baseline view. Do you think that this is going to kick the global economy into recession? Well, I think that, you know, the market is certainly justified to begin pricing in rate cuts by the Fed, especially now

with this Mexico x escalation. If you have you know, if you combine Mexican in Chinese imports to the US, you're talking about something like a third of all imports, and you're putting that at a tariff. A lot of these are consumer goods, a lot of these are inputs to supply chain. So yeah, there's there's a really meaningful risk that you could enter at least a mild recession

if this goes full throttle. And I'm just looking at the w I r P function as I do ten every day, it seems like but now it's all the way up to about a nine chance of a rate cut by the year end. Does that seem kind of reasonable from your perspective with with the recent escalation. Um, yeah, I mean it's if this, if they follow through and you know that. The thing is, I think people realize that it's not trust rhetoric, there's action being put behind it.

Now we've seen the tariffs with China, we need to see what happens with Mexico. There seems to be a big misunderstanding who's actually paying for these tariffs. Obviously was paying for these The importers are paying for them. So I mean it's it's it's it's a tax. It is a tax on importers. I mean there was a point in time where there was no income tax in this country. The only tax was tariffs. Um, in my time, before

all of our time. Alright, So alright, well, Mike, we'll follow up on this because I'm sure this is a story that will just keep developing. Mike McDonagh, chief economist for Financial Products for Bloomberg joinius here in our Bloomberg eleven three oh studios. Thanks so much. My takeaway is a ten chance of trade negotiations between China in the US. That's optimistic that's that's optimistic, Mike. Yeah, that's optimistic, Mike. Alright, Mike,

thanks very much. Potential tariffs on Mexico are also rattling markets. Take an additional perspective, we turned to Mark Chandler Marcus, I'm managing partner in chief market strategist for Bannockburn Global Forex based in New York City. Market so much for joining US. How disruptive do you think these new potential tariffs on Mexico could be for the U? S economy? Yeah? I don't think that the real danger in the short

run of the US economy per se. It's not good in a sense that you know, last year, the US economy is doing so well because we got tax cuts, and this year were getting tax increases and it's import tax increases. But I think that the disruption is I think it could affect the UH. You know, we were just beginning the legislative process for ratification of the NAFTA two point oh deal. I think that puts this at risk.

And if if you think about the other trade partners we have, I mean, what can they take away from this? It means that even a pending trade agreement with Mexico is not enough to save them from from such a surprise and tariffs. And so I think it's a questions. I think, uh, other countries willingness to take US negotiations seriously if the US can still prepare ups on on on Mexico despite having a free trade agreement, their free trade agreement in the works, because we still have the

first and after of course. Yeah, so this of course brings us to China, because China and the US have been mired and ongoing discussions about how to resolve their trade differences in the dispute there. Uh it what doesn't mean for emerging markets right now that the prospect of

a US China trade deal looks increasingly remote. Yeah, I thought that Mexico would have been one of the beneficiaries some countries, some and we see this right, some companies trying to move out of China, recognizing that the US and China might be in for sustained economic tension, do they want to move production closer to the US. Mexico is an obvious choice. In fact, since March Mexican, Uh, the US imports more from Mexico and it does from China.

And so I think that for a lot of emerging markets. I mean other emerging markets might stand to benefit. Now, maybe those countries in East Asia or maybe some other places in South America. Central America could be a beneficiary too. If Mexico is sort of like you have to raise questions about the tariffts at Mexico can faith So, Mark, what does this mean? I guess you know these trade tensions with China now Mexico cannot be good for emerging

market investing. What are your thoughts as you think about some of the emerging markets given what's going on. Yeah, I think that's the remarkable thing. Really, it's not really all emerging markets. Look what's happened. Uh Turkey, the Turkish lawyer, I think the strongest currency. I think it's up almost six percent since it bottomed in a couple of weeks ago. Uh. Indonesia has been upgraded by SMP just last night, and

with the re election and some political stability. Uh So, I think that there are some opportunities and emerging markets. I don't I won't think it's across the board as a negative, especially with the combination of falling interest rates and countries looking for like booster competitiveness. Company they're gonna be leading China. So I want to talk also than about where the havens are. So perhaps people are looking at where if the riskiest spots are in light of

some of these increasing trade tensions. When it comes to haven currency, the yen has been the spot, and yet the dollar is getting a bit more of a bid. Do you think the yen will retain its position? Really? Is the currency of choice? Well, funny they say that. I kind of think of how it works two ways.

I think to like channels. One channel is that a lot of institutions will use the yen, and the Swiss Frank is a funding currency to buy riskier asset because as retailer investors, people want to have the askt that they buy go up. But on the institutional level, you're only not only playing for the higher asset that you're buying,

but you're also trying to reduce your funding costs. And so the end of the Swiss frank typically funding currencies like the dollar, and so an emerging markets call under pressure risk assets come under pressure those those structured positions have to be unwound at the same time. UH short term speculators recognize this kind of pattern, and they also pour into a long Ganner long Swiss Frank positions when the risk appetites Wayne. So I think that the Yen

and the Swiss Franks still had that function. But it looks like what's happening. You know, the UH was driving down the US yield is showing you that the money is still coming into the US or in some cases staying in the US. When we're talking about our ten year bond yield below the lower end of the stead funds trading range. The stead funds, you know, their target range. And we see this in some other countries too. In Australia, the ten year bond yield has found below their cash rage,

which they might cut as early as next week. So Mark, just real quickly, what is your sense about the rest of Latin America's what's happening potentially in Mexico that bleed over either positively or negatively into some of the other Latin American countries. Well, I think that Columbia might be interesting alternative for companies who want to locate UH near the US, But now we're scared of Mexico UH because of the because of these latest things. I think that Colombia,

Brazil's got its own story. Brazil's kind of interesting, especially for those people are looking at those rare earth stories that I think Brazil has the second largest reserves of those rare earths, but they've got this pension reform issue going and so yeah, I I really think that the WILL focus is going to be really on these on these trade issues, like you say, Mexico and maybe some spill over some other countries could benefit, but I think

that's not really the heart of the issue. Mark Chandler, thank you so much for being with us. Mark Chandler, Managing partner in chief market strategist at Bannockburn Global for X, thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Bramwoods. I'm on Twitter

at Lisa bramwo Woods. One before the podcast, you can always catch us worldwide on Bloomberg Radio.