American financial markets plunged Friday after President Trump opened a new front in his already-broad trade war, threatening fresh tariffs on Mexico unless its government helps keep illegal immigrants from crossing the southern U.S. border.
The blue-chip Dow Jones Industrial Average tumbled 354 points, or 1.4%, to 24,815, the lowest since late January. The broader S&P 500 fell 1.3% and the tech-heavy Nasdaq composite dropped 1.5% as the moves fueled the risk of an economic downturn. Analysts warned the duties would undercut automakers who rely on Mexican production, and manufacturers cautioned that linking immigration challenges to trade will create “a Molotov cocktail of policy.”
“The potential measures, in conjunction with what is already being proposed as it relates to greater tariffs on China would very likely push our economy into recession by the end of this year,” Tony Roth, chief investment officer for Wilmington Trust, told the Washington Examiner.
Trump’s plan, announced first via his personal Twitter account, is to add tariffs of 5% on all Mexican imports starting June 10, increasing them by the same amount each month if the country fails to cooperate, to a cap of 25% on Oct. 1.
“It is our very firm belief that the Mexican government can and needs to do more to help us with the situation on the southern border,” acting chief of staff Mick Mulvaney told reporters on Thursday night.
“We are asking Mexico to do what it can because Congress will not,” added Mulvaney, a former Republican congressman from South Carolina. “This president will defend the nation. He will defend the southern border. If that means taking the tariffs to 25%, that means taking the tariffs to 25%. We hope — sincerely hope — it does not come to that.”
[Opinion: Trump’s latest Mexico tariff gambit is reckless and mindbogglingly stupid]
While Mulvaney said the new tariffs wouldn’t be linked to the U.S.-Mexico-Canada Agreement, Trump’s replacement for the North American Free Trade Agreement approved in the 1990s, Congress may well take a different view.
“The last thing we want to do is put that landmark deal — and the 2 million manufacturing jobs that depend on North American trade — in jeopardy,” said Jay Timmons, president of the National Association of Manufacturers. “The problem will not be solved just by blaming other countries. Intertwining difficult trade, tariff, and immigration issues creates a Molotov cocktail of policy, and America’s manufacturing workers should not be forced to suffer because of the failure to fix our immigration system.”
It’s unlikely that Mexico will ratify the USMCA with the tariffs in place, Roth said.
“This could torpedo the whole thing,” he added. “It essentially suggests to any given adversary within the trade war context that the problem is not with them, the problem is with the U.S., so they should stick to their guns.”
Trump, who has described himself as a “tariff man,” has tacked double-digit duties onto steel and aluminum imports to prop up the U.S. metals industry, as well as 25% levies on $250 billion of Chinese goods. He has threatened to add tariffs of the same level on $300 billion more in goods after an impasse in trade talks with Beijing, along with surcharges on cars and car parts.
Economists, executives, and even lawmakers from the president’s own party have reacted with dismay, warning that the tactics may undercut the benefits of 2017 tax cuts led by the GOP while pushing up prices and hurting consumers.
Margins at firms included in the S&P 500, a leading gauge of U.S. stock markets, dropped to an average 11.6% in the first three months of this year — down from a record high of 13% in the third quarter of 2018 before the duties took full effect, said David Bianco, chief investment officer for the Americas at DWS. That compares with an average 11.2% in 2017, the year before GOP-led tax cuts.
The Mexico tariffs, which would cost $17 billion at 5% and $86 billion at 25%, “will hinder U.S. economic growth” and increase pressure on the Federal Reserve to cut short-term interest rates, said Michelle Meyer, an economist with Charlotte, N.C.-based Bank of America.
The yield on 10-year Treasury notes tumbled to 2.13% on Friday, lower than the 2.35% on a three-month bill, a phenomenon that markets widely view as a recession indicator, since it shows investors more worried about immediate economic conditions than those a decade away. Typically, investors demand a higher premium on long-term notes since future conditions are more difficult to predict.
“We may continue to see escalation of the trade war — with both China and Mexico — until there is sufficient pain in the equity market to prompt President Trump to reverse course,” Meyer said. “Figuring out the pain threshold is a challenge. Clearly, it has yet to be reached.”
