Michael Every: Y tu tariffs tambien!
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“Mexico needs to produce more than it consumes”
Author: Michael Every Global Strategist, Rabobank
Part of the market is focused on earnings and misses. Part is focused on US data, where the Philly Fed for services screamed ‘stagflation!’ with its weak headline and high prices paid component, while existing home sales were -5.4% m-o-m. Another part is focused on the likelihood of rate cuts, which as our Fed-watcher keeps saying, miss that this will only be due to ‘stag’ and not ‘flation’. I’m still focused on the big picture driving all of the above – the framework of the future global economy being decided right now. I refer to the US 2024 election and tariffs, but it’s a broader issue than that; or, to put it another way, the rest of the world is acting like an opinion poll on one of the key 2024 election issues – trade.
Notably, leftist-led Mexico has joined the list of major economies (India, Indonesia, Turkey, the US, the EU, etc.) complaining about China’s vast trade surpluses. Finance Minister Ramírez states Mexico needs to review its trade relationship with China because it isn’t “reciprocal,” and it’s too dependent on Chinese goods. He flags $119bn of goods imports annually from China, but exports of $11bn; other data suggest it’s $81.5bn vs. $18.8bn, but regardless the trade deficit hit a new high in 2023 and has doubled since 2018. He’s pushing a ‘Plan Mexico’ to “maintain our industry, our jobs, and our salaries,” as, “like North America,” Mexico needs to produce more than it consumes and, “It’s logical that both Americans and Mexicans are demanding our fair share of this global demand [for exports].”
In April, the Mexican government implemented new tariffs on more than 500 Chinese products, but as a former Mexican trade expert puts it, more needs to be done quickly to “help Mexican industry withstand this tsunami of Chinese imports.” Indeed, he states that “ideally,” Mexico, the US and Canada would all “mirror each other’s tariffs” on Chinese goods. Moreover, while Mexico is seeing plenty of Chinese FDI, as a ‘backdoor’ into the US market, Ramírez also stated the government is “considering” changing its investment policy, suggesting it could seek to prevent or limit Chinese investment in some sectors.
Three points immediately spring to mind. The first is, “But this means inflation!”
Yes, but the thinktank The Coalition for a Prosperous America (CPA) just published ‘An Economy-Wide Model with Flexible Supply Response to Taxes and Tariffs’ arguing the US economy can respond positively to import restrictions. As the CPA notes, the standard trade model, Global Trade Analysis Project (GTAP), assumes full employment in the economy before and after trade policy actions, as well as other inaccuracies. They quote veteran economic modeler Professor Tim Kehoe, a former advisor at the Minneapolis Federal Reserve Bank, after looking at years of GTAP studies, as concluding the model had demonstrated “zero predictive accuracy.”
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