Market will rip on a Mexico/US Deal
Trump continues to throw the U.S.’s economic weight around.
He has picked fights with pretty much every major trading partner: Europe, Canada, Mexico and China.
Any movement in his favor means major economic boosts in the form of greater exports and domestic production. The stock markets have already concluded that he holds the winning hand.
Here’s Trump’s strategy: flip the smaller economies to get to the bigger economies.
In addition, negotiate directly instead of through trade bodies; trade bodies protect the weaker members in a strength-in-numbers environment.
Under this approach, Trump went after NAFTA first (Mexico and Canada are the small fish) and he is negotiating separately instead of under a pan-NAFTA banner.
In this game of dominos, Mexico will topple first and next will come Canada. But the real prizes are the European Union (E.U.) and China.
The Counter Strategy: A Waiting Game
Tariffs and trade are the domain of the President of the United States, which means that Congressional mid-term elections don’t have direct impact. But they do matter because a shift in Congressional power in favor of the Democrats will force compromises in general but will also lead to more attacks on, and distractions for, Trump. A distracted and/or weaker Trump undermines his leverage.
With that potential political shift, China and E.U. are playing the waiting game.
However, this approach will fail.
First, because Trump will only harden his position if Mexico compromises – it validates and vindicates his efforts. (Or, put differently, he’s a shark who smells blood in the water).
But more critically, Trump is forcing the Democratic party to support him or risk being on the wrong side of the upside benefits of winning trade wars and the spoils it brings.
Politics matters. But not in the sense that China and the E.U. believe.
They think a Democrat controlled House of Representatives matters to slowing the Trump Tariff train. That’s wrong because Dem’s have to get on board that train or risk losing popular votes.
What will happen? We’re about to find out.
Editor of Moneyball Economics