Why Now the Mexican Tariff Threat?

Why Now the Mexican Tariff Threat? — Mexico — A Winner in the Trade War — With China — U.S. Winners as Mexico Wins

Tariff Threat Against Mexico — Why Now?

A brief note after the tariff threat the President made against Mexico and the resulting agreement. In our view, the timing of the President’s threat resulted from the startling increase in southwest border apprehensions in May. That number jumped to nearly 145,000 in May compared to about 52,000 a year ago (see Figure 1). To offer a sense of that size, the U.S. recently commemorated the 75th anniversary of landing 156,000 troops on the beaches of Normandy — D-Day — not an appreciable difference from the latest month’s undocumented migration flow.

Figure 1


The Agreement — Controlling the Southern Border of Mexico

Over the last weekend, both countries announced agreement efforts to control the inflow of migrants the majority of which come from Central America. Mexico’s 540-mile southern border with Guatemala contains rough and varied terrain, including mountains and jungles – resulting in difficultly protecting it. In an attempt to control that border, Mexico agreed to send 6,000 new troops to its southern border. The success of this effort remains uncertain since the powerful drug cartels hold heavy sway over the southern Mexican states.


The Agreement — Holding Migrants in Mexico

In addition, Mexico agreed to hold more migrants seeking U.S. asylum inside Mexico until their requests can be processed in U.S. courts. Apparently there will be no limits to the numbers Mexico agreed to hold in their communities. As a practical matter, the limit will likely arise from northern Mexican border communities overwhelmed with these migrants. A recent poll of Mexicans’ opinions of migrants by EI Universal showed over 62% opposed allowing migrants into Mexico and giving them refugee status.


Mexico a Winner in the Trade War With China

At the same time, Mexico emerges as a near-term benefactor in the U.S. trade war with China (see figure 2). If Mexico reduces the migrant pressure on the U.S. southern border, than long-term it should also see a sizeable influx of investments from global corporations looking to move their key supply chains away from China. In the case of products that support the U.S. national security efforts, corporations face no choice.

Figure 2

U.S. Imports—Jan-Apr 2019 Compared to the Prior Period (Billion $)

Source: WSJ/The Daily Shot


Investment Conclusions

In our view, settlement of the trade war with China will not put a stop to movement of supply chains away from China. The history of China’s relationship with global corporations and the current trade dispute will encourage this movement. At the same time, if Mexico shows satisfactory movement in reducing the migrant flow to the United States, corporations will likely see the advantages from relocating their Chinese facilities to Mexico. By doing so, they will likely avoid uncertain business and political operating environments developing in China. The net result will be faster growth for Mexican production and services supporting global corporations. With that, U.S. business providing transportation and other services that support production and movement of products between the U.S. and Mexico should see long-term growth.



Andrew J. Melnick, CFA

Chief Investment Strategist

First Capital Investment Partners


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