(Bloomberg) -- Prospects for a U.S.-China trade deal just became even more remote after President Donald Trump whacked tariffs that could rise as high as 25% on Mexico until that country stops immigrants from entering the U.S. illegally.
"A U.S.-China trade deal will be even less likely,” said Khoon Goh, head of research at Australia & New Zealand Banking Group Ltd. in Singapore. “At the end of the day, what’s the point of doing a deal if the U.S. can just impose tariffs arbitrarily?”
Investors are already bracing for a prolonged economic stand-off between the world’s two biggest economies. One potential beneficiary of the impasse was likely to be Mexico as companies considered shifting supply chains away from China toward lower-cost markets closer to American consumers. The latest escalation of Trump tariffs threatens that process.
“This is throwing sand” into the U.S.-Mexico-Canada Trade Agreement, said Cliff Tan, East Asian head of global markets research at MUFG Bank Ltd. “When you only have a hammer, every problem looks like a nail.”
What Bloomberg’s Economists Say...
“The read across from Mexico to China will add to concerns that talks between Washington D.C. and Beijing are going nowhere. Mexico negotiated revisions to NAFTA, only to be hit with sweeping higher tariffs. Other countries, including China, will be taking note, perhaps concluding that negotiated agreements with the U.S. are of little worth."-- Chang Shu, Yuki Masujima, Tom OrlikClick here to read the full report
The latest U.S. tariff threat unsettled markets in Asia Friday morning, with analysts seeing more pain ahead of Trump’s planned imposition of the duties on June 10.
“It’s clearly a further risk-off development, and keeps alive the bond rally, undermines thoughts of an upward equity correction and should keep the dollar grinding stronger,” said Rob Carnell, Asia-Pacific head of research and chief economist at ING Groep (AS:INGA) NV in Singapore.
Businesses that had looked to Mexico as a low-cost substitute for tariff-battered Chinese production, especially in the automobile sector, now are facing a fresh challenge to their trade-war plans.
“This is another attack on supply chains,” Mary Lovely, a Syracuse University economics professor who focuses on trade with China and supply chains, told Bloomberg Television. “This is really going to hurt American businesses who use Mexico to reduce their costs and stay competitive with Europe and Asia.”
More troubling for some, it throws into question how other countries -- such as Japan and European economies, in addition to China -- will change their calculus around trade negotiations with the U.S., and what this all means for an already-fragile global trade order.
“It is unlikely to matter to him, of course, but it will make the global trading system much more precarious,” Deborah Elms, executive director of the Singapore-based Asian Trade Centre, said in an email, referring to Trump. “The largest player will have clearly ‘gone rogue.’”
“The Mexican immigration issue is simply not allowed” as any sort of legal justification for tariffs, as opposed to when the U.S. imposed duties on steel, aluminum and other products, said Elms. “There is no provision that lets a member block trade over migrants. The consequences are therefore much bigger than just what happens to companies operating between the U.S. and Mexico or within NAFTA.”
The U.S. tariffs come just after the Treasury Department this week used an annual currency manipulation report to apply pressure on the trade front. While China was spared the rare “manipulator” tag, the U.S. expanded the watchlist, highlighting as one of its three criterion those economies that have trade surpluses with the U.S. that are deemed excessive.
The announcement on tariffs for Mexico revived fears that the bilateral trade balance could be further weaponized by the U.S., David Mann, global chief economist at Standard Chartered (LON:STAN), said in an email. “This news does leave the world wondering whether Trump’s use of tariffs could become ever broader," he said.
(Updates with more comments from analysts throughout.)