It’s only 5%, Wall Street is saying today in what clearly sounds like an effort to convince itself when investors really know better. That unconvincing “happy talk” is why the Standard & Poor’s 500 index was down only 1.24% at the close today, May 31. (I say “unconvincing” because the oil markets, which have been very sensitive to any possible slowdown in the global economy, are down very big time today with U.S. crude benchmark West Texas Intermediate down 5.85% on the day to $53.28 a barrel and international benchmark Brent crude down  3.56% to $64.49 a barrel.)

I’d argue that the tariffs, that start at 5% on June 10% and then escalate by 5 percentage points a month unless Mexico fixes it’s illegal immigration problem (as defined by the U.S. White House), are even more important than the final 25% that tariffs could reach by October if Mexico doesn’t stop immigrants from reaching the U.S.-Mexico border.

Why is it so important? (For the duration of this post I’ll ignore the issue of whether the U.S. President really has the legal authority under the U.S. International Emergency Economic Powers Act to impose these tariffs and whether this move, roundly unpopular with the corporate community in the United States, will finally push the Republican Senate to oppose the President.)

First, the United States is in the middle of an effort to get Mexico, Canada, and the U.S. Congress to approve a trade agreement to replace NAFTA. The tariff move isn’t going to make it easier for the White House to win agreement for the USMCA. Especially not when one of the key U.S. trade figures, Peter Navarro praises the tariff move by saying that illegal immigrants are one of Mexico’s most important export products.

Second, the U.S. is in the midst of a trade face-off with China. One of the key bits of leverage in that battle, the White House has said, is that the 25% tariff that the United States just imposed on an additional $200 billion in Chinese exports (with a 25% tariff threatened on another $320 billion in Chinese goods) will push manufacturers to relocate from China to other low cost production platforms such as Mexico or Vietnam or bring that manufacturing back to the United States. If I were a CEO trying to decide where to source important parts of my supply chain. I’d certainly have to wonder if undertaking the expense of moving production out of China is worth it given the mercurial nature of U.S. tariff policy.

Third, whether of not linking higher tariffs to a policy issue such as immigration is legal under U.S. law, the move puts the United States at odds with the rules of the World Trade Organization, which seek to limit the degree to which a country can raise trade barriers for non-trade reasons. Linking higher tariffs on Mexican exports to Mexican immigration policy isn’t within the WTO rules. (Of course, the Trump administration despises the WTO so I doubt this issue matters to the White House. But it does matter to U.S. trading partners.)

Fourth, and quite possibly most importantly, the imposition of tariffs overnight on the basis of a non-trade issue on the exports of a country with which the United States has just negotiated a trade agreement (even if yet unratified by all parties) has to raise the question of whether it’s worth negotiating trade issues with the United States at all. What’s the point, if the United States can’t be trusted to keep its word, I’m sure the Chinese and the Europeans are arguing right now.

It’s only 5%. But the damage to the U.S. position in its trade war with China, in its discussions with the European Union over car exports, and in effort to win approval of the USMCA trade agreement is much, much larger.

In market terms, if you had any thoughts that the U.S.-China trade war might reach a negotiated end in 2019, I think you should throw that thinking out the window.

This administration has an observed tendency to double-down on positions and I think we’re seeing that right now with the tariffs on Mexico actually a doubling down on the tariffs with China.

And I think the odds just increased that the Trump re-election effort sees bashing China and now Mexico (and what about that Canada-U.S. maple syrup war?) as a winning stance for 2020. In which case the trade wars not only continue but actually escalate into  the November 2020 election.