Tariffs are essentially taxes that are paid by U. S.-based importing companies, which then pass the extra expenses along to the end consumer. Historically, faster inflation has boosted investor demand for gold, which crossed above $1,320 an ounce on Monday for the first time since late March.
“Tariff Man” strikes again. In a surprise tweet last Thursday, President Donald Trump announced that, beginning June 10, the U. S. would impose a 5 percent tariff on all goods coming into the U. S. from Mexico “until such time as illegal migrants coming through Mexico, and into our Country, STOP.” The tariff is scheduled to rise incrementally to a hefty 25 percent through October.
Tariffs are essentially taxes that are paid by U. S.-based importing companies, which then pass the extra expenses along to the end consumer. If Trump’s Mexico tariff goes into effect, in fact, it will be the largest tax hike on Americans in approximately 30 years. As such, tariffs are inflationary. Historically, faster inflation has boosted investor demand for gold, and indeed, the price of the yellow metal crossed above $1,320 an ounce on Monday for the first time since late March.
Gold miners have also increased sharply. The NYSE Arca Gold Miners Index jumped nearly 4 percent in intraday trading on Friday, the group’s biggest one-day gain in two years. The S&P 500 Index, meanwhile, lost some $1.5 trillion in market cap in the month of May.
Investors also sought protection in U. S. Treasuries, whose yields fell to a fresh 2019 low. This pushed the already-inverted yield curve between the 10-year and three-month Treasuries deeper into negative territory. On Friday the yield curve sunk to 17 basis points (bps), its lowest level since well before the financial crisis. An inverted yield curve has preceded every U. S. recession over the last 60 years.
Tariffs Against Mexico Will Hit Middle-Class Americans
In 2018, the total value of imports from Mexico stood at $346 billion. A 5 percent tariff on this volume amounts to a $17 billion hit on the U. S. economy. At 25 percent, this cost surges to a whopping $87 billion.
To be sure, this will have a much more direct inflationary impact on middle-class Americans than tariffs on Chinese goods have had so far. That’s because Mexico—besides being the number one exporter of car parts and vehicles to the U. S.—is also America’s top supplier of agricultural goods, with exports totaling $26 billion in 2018 alone. Fresh fruits and vegetables (valued at a combined $11.7 billion), beer and wine ($3.6 billion), snack foods ($2.2 billion) and more are all set to rise in price at your local grocery store if the 5 percent tariff takes effect as planned.
Think I’m exaggerating? On an investor conference call last week, Costco Chief Financial Officer Richard Galanti said, “At the end of the day, prices will go up on things” due to tariffs on Chinese and now Mexican-made goods.
For some idea of what might happen with food prices, take a look at what corn has done in the past month alone. Granted, this price jump is due to inclement weather, which put U. S. famers behind in their planting schedule. But imagine all of your tomatoes, avocados, cucumbers, onions, strawberries and other produce from Mexico making similar moves. This would have a serious multiplying effect on the U. S. economy.
Vehicle prices are also likely to climb. In a press release dated May 31, Matt Blunt, president of the American Automotive Policy Council (AAPC), wrote that tariffs against Mexico will undermine the United States Mexico Canada Agreement (USMCA)—the not-yet-ratified replacement for NAFTA—and “would impose significant cost on the U. S. auto industry.”
Speaking specifically of General Motors (GM), Citi analyst Itay Michaeli said that the 5 percent tax could result in a significant “several-hundred-million-dollar” impact to the carmaker’s annual earnings. Shares of GM, Ford and Fiat Chrysler were all down significantly in Friday trading.
Could Trump Be Ambushing His Own 2020 Reelection Bid?
Taken as a whole, the Mexican tariffs could very well end up being the one policy that costs Trump many die-hard supporters who have stuck with him up until now.
On Thursday, the U. S. Chamber of Commerce—the staunchly Republican business lobbyist group—condemned the president’s plan, writing that “tariffs on goods from Mexico is exactly the wrong move. These tariffs will be paid by American families and businesses without doing a thing to solve the very real problems at the border.”
High-ranking Republican Senator Chuck Grassley of Iowa, who has also safely been in Trump’s corner on most policies, came close to suggesting the imposition of tariffs was an abuse of power.
