Global Geopolitical Series: Tariffs by Mexico shows trade wars are for real as market underprices risk

We at FxWirePro, currently believe that the financial market is underpricing the risk of potential trade wars between the United States and the rest of the world. The common belief is that Trump administration’s threats are negotiating tactics. The recent happenings in Mexico grossly challenge the idea.

As U.S. metal tariffs (25 percent on Steel &10 percent on Aluminum) go live in June, after warning of retaliatory tariffs, Mexico has slashed 20 percent tariffs on several U.S. imports ranging from Pork to Steel to fruits. As the announcement came that tariffs would be imposed with immediate effect, the Mexican peso tumbled against the U.S. dollar. USD/MXN currently at 20.39 area.

While it is clear that Mexico would be the poster child of the tariff retaliation against the United States, one must note the recent change in rhetoric from key U.S. partners such as the European Union and Canada, which have nothing but toughened.

While the European Union announced that it would not negotiate with the United States on trade with a gun [tariffs] pointed to the head, Canada announced that it weighing its options and likely to impose tit for tat tariffs on U.S. imports, in response to Trump administration’s metal tariffs.

With president Trump determined to reduce the trade deficit, it looks like countries can either surrender or retaliate and that increases the risk significantly as the U.S. fights with giants like the EU and China.