China is unhappy with Mexico’s new 50% tariffs on Chinese cars. These tariffs, influenced by the U.S., could affect $52 billion in trade.

Negative Impact On Mexico’s Business Environment

The Chinese commerce ministry argues that these tariffs will harm Mexico’s business landscape. They warn that this could discourage companies from investing in Mexico. China is also ready to take measures to defend its interests. As a result of the new tariffs, the Mexican Peso is likely to face pressure. It has already dropped 4% against the dollar in the last two weeks, echoing the uncertainty seen in early 2024. Traders might consider buying puts on the Peso or the EWW ETF to protect against further declines during this trade dispute. The biggest impact will be on Chinese automakers, as their access to the market nearby is now limited. We’ve already seen shares of major Chinese EV companies fall by over 8% on the Hong Kong exchange this week. Buying put options on these specific stocks or a broad Chinese technology ETF could be a smart way to respond to the effects of these tariffs. This situation adds to the overall uncertainty in the market, especially for emerging markets that are caught between the two powers. The Cboe Emerging Markets ETF Volatility Index (VXEEM) has risen 15% this month, indicating growing investor concern. We think buying call options on volatility indexes could be a good strategy to benefit from the expected market fluctuations.

Unexpected Retaliation And Market Protection

We also need to monitor the impact on U.S. companies that depend on Mexican manufacturing. We recall how supply chain issues during the 2018-2020 trade disputes affected profits, and a similar scenario could arise if China retaliates. Protective puts on U.S. auto-sector ETFs might be a wise safeguard against potential disruptions and increased production costs. China’s vague threat of “necessary measures” raises the risk of unexpected retaliation that could hit other sectors. This uncertainty makes it smart to have some protection for the broader market. We are looking into inexpensive, out-of-the-money puts on major indices as a form of insurance against a sudden escalation beyond just the auto industry. Create your live VT Markets account and start trading now.

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