One of the world’s largest free trade zones is under attack
The Sandbox Daily (12.4.2024)
Welcome, Sandbox friends.
Today’s Daily discusses:
unpacking President-elect Trump’s tariff threats
Let’s dig in.
Blake
Markets in review
EQUITIES: Nasdaq 100 +1.24% | Dow +0.69% | S&P 500 +0.61% | Russell 2000 +0.42%
FIXED INCOME: Barclays Agg Bond +0.32% | High Yield +0.24% | 2yr UST 4.131% | 10yr UST 4.184%
COMMODITIES: Brent Crude +1.92% to $93.26/barrel. Gold +0.24% to $2,674.2/oz.
BITCOIN: +2.64% to $98,423
US DOLLAR INDEX: -0.02% to 106.352
CBOE TOTAL PUT/CALL RATIO: 0.83
VIX: +1.13% to 13.45
Quote of the day
“What frightens us today is exactly the same sort of thing that frightened us yesterday. It's just a different wolf.”
- Alfred Hitchcock
One of world’s largest free trade zones under attack
The United States-Mexico-Canada (USMCA) Agreement, which replaced the North American Free Trade Agreement (NAFTA) in 2020, is a trade pact between the three nations designed to modernize their trade rules on digital trade, intellectual property, labor standards, and environmental protections.
The spirit of the treaty was to eliminate most tariffs and trade barriers, thus promoting economic integration and increased trade and investment flows across North America.
President-elect Donald Trump has threatened to implement 25% tariffs on all imports from Mexico and Canada unless these countries curb the flow of illegal drugs (specifically fentanyl) and illegal immigrants – thus undermining the USMCA Agreement.
If implemented at face value, the economic impact of the proposed tariffs would have extensive and profound impacts.
After China, Mexico and Canada are the second and third largest sources of imports to the United States totaling roughly $900 billion (as of 2022). Also, an estimated 17 million jobs rely on trade across North America as supply chains, manufacturing, and employment are deeply integrated over these borders.
The market fallout – or lack thereof – has been rather surprising.
Take Mexico’s key interest rate and its currency, the peso, which have been remarkably resilient in the face of this significant trade threat. The peso is only ~1% higher relative to before U.S. election night, while the spread (read: extra credit risk) between Mexico and US rates has been declining since the election.
Keep in mind that over 80% of Mexico’s merchandise exports go to the United States.
Meanwhile, the Canadian dollar’s already-in-progress descent has continued its steady march lower, with the Trump-induced loonie spike nothing more than a momentary blip.
Stock markets are powerful discounting mechanisms, instantaneously pricing in all future events and risks as new information is rapidly digested.
The investment results since election night don’t portend any material risk to the largest corporations in either country.
Make no mistake, these proposed tariffs would impact consumers in the United States.
Shoppers would see higher prices throughout the produce department, since Mexico and Canada supply 32% of the fresh fruit and 34% of the fresh vegetables sold in the U.S. Do you think Americans are ready for another spike at the grocery store or at your local restaurant?
Another key example is the U.S. auto industry, where certain automotive parts can travel across the U.S.-Mexico-Canada borders five or times over before finally ending up in a made-in-America automobile. Introduce a 25% tariff and car manufacturers will feel the impacts immediately.
The National Retail Federation wrote a report stating that Americans stand to lose between $46 billion and $78 billion in spending power each year on products including apparel, toys, furniture, household appliances, footwear, and travel goods due to the new tariffs. $50 pair of running shoes would jump to $59 to $64. A $2,000 mattress and box spring set would cost $2,128 to $2,190, the NRF said.
Heavy manufacturing, petroleum, electronics, medical equipment, agriculture.
The list goes on and on.
Here is Ned Davis Research on the impact on consumer prices:
“The immediate effect for the U.S. would be higher prices for U.S. consumers, with greater impact on products with low trade elasticity, such as computer and electronic products and some other durable goods. Given that the U.S. labor market is nearly balanced, and the
economy is running above potential, repatriating production and manufacturing jobs to the U.S. would also likely be inflationary. A stronger dollar is an offsetting factor, as it would eat some of the tariff surcharge.”
Dismiss the President-elect Trump tariff threats at your own peril, yet the market is saying otherwise: the Trade Policy Uncertainty Index is already spiking to its highest level since 2019.
The impacts to economic growth, global trade, consumer prices, and sovereign relations all create significant downside risks – something all investors must weigh should policy threats elevate to actual sovereign procedure.
Source: Truth Social, Visual Capitalist, Goldman Sachs Global Investment Research, Brookings Institute, YCharts, The Hill, CBS News, National Retail Federation, Ned Davis Research
That’s all for today.
Blake
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Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.
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