Economists have warned of the effects President Donald Trump’s potential trade war with Mexico will have on both the U.S. and Mexican economies. While there has been some walking back, Trump had proposed a 20 percent tariff on Mexican goods to help pay for a wall along the southern border.
Mexico would almost certainly suffer a recession with rising unemployment and a weakening peso, and the U.S. economy would be weakened in what could lead to a global recession.
Two prominent Republican senators, John McCain and Lindsey Graham, have publicly expressed concern about Trump’s tariff policy and changes to the North American Free Trade Agreement (NAFTA). “Any effort to restrict or impose new barriers on our ability to trade with Mexico and Canada could jeopardize the future of this trade agreement and have serious consequences for Arizona and the country,” McCain said in January.
Only Canada and China are larger trading partners than Mexico with roughly $531 billion in goods traded between the two countries in 2015. If a trade war occurs, Americans would have to pay more for avocados, tomatoes, beer, and tequila — and that’s just food.
Well-known companies may also feel the pinch. Chipotle Mexican Grill Inc., one of the largest Mexican food chain in the U.S., relies on the price of avocados and tomatoes, which they mostly get from Mexico. Chipotle reported fourth-quarter earnings on Thursday with sales at Chipotle’s established restaurants falling 4.8 percent. The company disclosed that they were hurt by the rising cost of avocados and chopped tomatoes.
In a recent Barron’s article, Maxim analyst Stephen Anderson cited that “a case of avocados now costs $40, while a 25-pound box of tomatoes goes for $11.” So a 20 percent tariff would severely hit Chipotle’s earnings per share.
Then there’s Wal-Mart. The super chain has over 2,400 stores in Mexico and relies heavily on Mexican imports. Much of Wal-Mart’s sales come from produce so a tariff would almost certainly mean a spike in prices and therefore hurt their long-term outlook.
“Wal-Mart has been losing a lot of business already for other reasons. They cannot survive as a high-priced retailer. I’m not saying they would go bankrupt the next day, but in the long run a lot of what Wal-Mart does just wouldn’t make sense,” said economist Tyler Cowen in a Bloomberg report in August.
A day after Trump proposed the 20 percent tariff, shares of Wal-Mart Stores (WMT) dropped more than 1 percent. Since Nov. 9, shares of Wal-Mart Stores have dropped from $71.10 to a close of $66.40 on Monday.
Aside from Chipotle and Wal-Mart, a trade war with Mexico could have damaging effects on the overall economy.
“For both the U.S. and Mexico, it’s challenging because if you start putting tariffs on imports from the other country, you’re essentially putting tariffs on some of the inputs of many of the things you want to make,” Robert Blecker, professor of economics at the American University, told Salon in January.
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