Mexico plans to raise tariffs on Chinese cars to 50%, up from the current 20%. This increase will impact $52 billion in imports across various sectors, including automobiles, steel, and textiles. The Mexican government aims to protect 325,000 jobs and ensure vehicles aren’t sold below “reference prices.” These tariffs will need congressional approval and target imports from countries without trade agreements with Mexico, such as China, South Korea, India, Indonesia, Russia, Thailand, and Turkey. This move appears to be a response to U.S. pressure to reduce China’s role in Latin America.

Economic Impact Of Tariffs

Economy Minister Marcelo Ebrard argues that these tariffs, set at the highest level allowed by WTO rules, are essential for keeping Mexico competitive. Meanwhile, China has criticized the tariffs as protectionist and has indicated that it will defend its trade interests. With these proposed tariff hikes, we can expect more fluctuations in the Mexican Peso (MXN). Traders might consider buying options straddles on the MXN/USD currency pair to benefit from significant price movements, regardless of direction. Earlier this year, two-way trade between the U.S. and Mexico exceeded an annualized rate of $850 billion, so any disruptions could greatly affect currency value. The auto industry offers clear opportunities for trading specific stocks. For instance, buying put options on Chinese automakers like BYD, which are expanding in Latin America, could be wise since the tariffs would impact their growth plans. On the other hand, call options on established Mexican companies like GM or Nissan could be favorable, as they would face less competition from cheaper imports.

Commodities And Congressional Vote

This policy will likely affect more than just cars, so it’s important to keep an eye on industrial commodity futures, especially for steel. We experienced significant volatility in steel futures during the 2018 trade disputes, and a similar scenario could arise as the market adjusts to new supply chain costs. Purchasing long-dated call options on North American steel producers could help protect against expected price increases. Ultimately, the key factor is the upcoming congressional vote in Mexico. Until a decision is reached, uncertainty will prevail. Therefore, options that benefit from rising implied volatility could be wise. We’ve already observed increased option costs on the iShares MSCI Mexico ETF (EWW), reflecting market concerns about potential disruptions to the 325,000 jobs the government seeks to defend. Create your live VT Markets account and start trading now.

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