Confronting Fear of Tariffs in Mexico

More than any other issue influencing investors in the past year and a half, the ongoing trade war has dominated financial headlines and broad-market price action as a primary driver of sell-offs and relief rallies. Market commentators tend to characterize the trade war as a tale of two rivals, the U.S. and China, but Mexico has been much more than just collateral damage amid the persistent posturing and brinksmanship.

Mexico, ever rife with investing opportunities, has been caught in the crossfire of two Trump-era hot-button issues: the trade war and immigration reform. Investors in this globally interconnected world must unpack and address the issues surrounding these topics - and allocate with caution without allowing politics to get in the way of profits.

An Escalating Threat

Unlike the Sino-U.S. tariff conflict, the tug-of-war with Mexico is directly related to the issue of immigration. With President Trump using Twitter as his communication methodology of choice, investors have been able to "trade the news" in real time - if they can keep up with the breakneck-paced developments.

On May 30, 2019, Trump confronted the border issue head-on with a series of tweets declaring, "On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied, at which time the Tariffs will be removed."

After the initial 5% tariff imposition, a monthly ramp-up of tariffs was threatened: 10% on July 1, 15% on August 1, 20% on September 1, and 25% on October 1. The tariffs were to apply to all imports from Mexico into the U.S., with no mention of exemptions (as opposed to some of the President's threats against China, some of which made allowances for exemptions).

Whether the imposition of such tariffs would have hurt Mexico or the U.S. more is up for debate. The President has contended that "In order not to pay Tariffs, if they start rising, companies will leave Mexico, which has taken 30% of our Auto Industry, and come back home to the USA." The Economic Policy Institute's Robert Scott, in contrast, asserts that "Tariffs will raise the costs of North American vehicles and reduce their competitiveness with imports from other countries. It is a lose-lose strategy."

On Again, Off Again

The debate seemed to cool off, however, as Trump tweeted on June 7, "I am pleased to inform you that The United States of America has reached a signed agreement with Mexico. The Tariffs scheduled to be implemented by the U.S. on Monday, against Mexico, are hereby indefinitely suspended."

The President added that the Mexican government "agreed to take strong measures to stem the tide of Migration through Mexico, and to our Southern Border." Investors were able to breathe a sigh of relief amid a timely detente - or so it seemed, at least.

Three days later, on June 10, Trump called the finality of the agreement into question with a series of tweets stating that the immigration deal with Mexico "will need a vote by Mexico's Legislative body" and that "if for any reason the approval is not forthcoming, Tariffs will be reinstated."

Then another twist: on July 1, the President told reporters that Mexico was doing a "great job" in its efforts to reduce the flow of immigrants to the U.S. and that Mexico's efforts in that regard have had "a very big impact" on migration. Much to investors' relief (again), Trump added that the proposed tariffs Mexican goods were now off the table.

Knowing That You Don't Know

This sense of relief may or may not be short-lived, though, as there's no telling whether the tariff threat will remain in abeyance for long. Indeed, on September 26 Trump said, "I'm using Mexico to protect our border," reminding market investors that the issue remains foremost in the President's thoughts - and that conflict could re-emerge at any given moment.

Investors, both domestic and global, are confronted with the challenge of navigating an economic landscape fraught with the market's least favorite emotion: uncertainty. Like it or not, there's no way to predict the course of U.S.-Mexico relations; as soon as we accept uncertainty as a certainty, investing becomes agnostic - and much easier.

The ideal mind-set for confronting the fear of tariffs in Mexico, then, is to accept that fear and thereby reduce its impact on your allocation strategy. The same principles that apply to all highly uncertain economic environments apply now: diversify your portfolio across regions and asset classes, don't over-allocate into any single investment, and take a long-term view instead of trying to anticipate every geopolitical twist and turn.

Most of all, know that tariff battles will come and go, while Mexico will remain a nation and an economy with much to offer through the years - robust, growing, and for the most patient investors, supremely rewarding.

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