President Donald Trump’s announcement late last week that the U.S. would impose tariffs on all Mexican goods starting on 10 June to “address the emergency at the southern border” was disruptive, but not necessarily surprising. After all, the president shut down the government earlier this year over the same issue and has also threatened to circumvent congressional authority to build a wall on the southern border to stem the flow of migrants; moreover, illegal immigration continuously polls as one of the highest concerns among Republican voters.

With all of that in mind, what might be more surprising is that the markets seem to continue to underestimate President Trump’s conviction on this and other issues under his so-called “America First” agenda.

What’s next?

If meetings with Mexican officials in Washington this week do not result in a breakthrough – and at least at this point, there is no indication they will – we should expect the U.S. to move forward with the initial round of 5% tariffs on Mexican goods. At the same time, we believe tensions with China are likely to get worse before they get better, and that the chances of the U.S. moving forward in some capacity with tariffs on the balance of $300 billion of Chinese goods are only increasing.

Moreover, we think the market underestimates the chances that President Trump will move forward on withdrawing from NAFTA in order to force a vote on the newly negotiated U.S.-Mexico-Canada Agreement (USMCA). Indeed, the White House has now started the ratification process on the USCMA without any real commitments to addressing House Democrats’ concerns on issues related to labor, the environment, and pharmaceuticals, which makes us believe the president could try to force House Speaker Nancy Pelosi’s hand to bring the USMCA up for a vote – something she is unlikely to do without Democrats’ concerns being addressed. This could set up a game of chicken and possibly result in President Trump withdrawing from the agreement altogether.

In short, we think the markets discount President Trump’s threats on both trade and immigration issues at their own peril.