Trade correspondent L.C. reports:
In one of his biggest trade surprises, President Trump announced on May 30th that he was invoking the International Emergency Economic Powers Act of 1977 to impose tariffs on all goods imported from Mexico. The tariffs will increase in monthly 5% steps until Mexico takes unspecified further actions to stem the flow of migrants across its northern border. While the president’s unorthodox use of tariffs for border control has caught Mexico’s attention, it risks US credibility for all present and future diplomacy, trade or otherwise. It also takes the pressure off the Democrats to help solve the border crisis, which they up to now have been refusing to do.
The president’s unexpected tariff order also sets back the progress that had recently been made toward gaining three-country legislative approval of one of the president’s signature efforts, the US-Mexico-Canada trade agreement (USMCA) to upgrade NAFTA.
The threatened new tariffs are to be hiked in stages, halted at any time that Mexico acts to the US’s satisfaction. All imports from Mexico will be hit with a 5% tariff on June 10th, raised to 10% on July 1st, 15% on August 1st, 20% on September 1st, and 25% on October 1st – and stay at that level indefinitely.
Mexico is not seen likely to bow to such pressure, while the blow the tariffs will wreak on the Mexican economy if fully implemented will create an incentive for more Mexicans and Central American refugees in Mexico to cross the border in search of better economic prospects.
The president’s latest action – like his recent move to hike tariffs on India – appears to confirm that the president’s goal is to move manufacturing back to the US from all other countries – not just China. It drastically ups the uncertainty for the array of US companies that had been looking to move facilities from China to Mexico to avoid the escalating US tariffs.
Moreover, whereas many had thought that the recent removal of the Section 232 tariffs on Canadian and Mexican steel and aluminum signaled that the president wanted to clear the deck of other disputes so that he could focus on China, in fact he continues to be just as interested in going after other, friendlier trading partners.
In this case, he reportedly also sees the new tariffs as a way to claim he is getting Mexico to pay for his promised southern border wall, thus keeping a campaign pledge. But tariffs, under WTO rules, aren’t supposed to be used for such purposes.
To the extent that he still hopes not only for congressional approval of the USMCA but for progress in trade talks with Japan, the EU, and China, this move creates enormous difficulties. Other trading partners will now worry they can’t trust him not to make sudden moves undercutting any concessions they might offer or deals they might reach.
From that standpoint, the new tariffs on Mexico are consistent with the president’s unilateralist trade policy and his self-identification as “Tariff Man,” an identification he continued to tout this week in tweets that were insulting to Mexico. This could make it harder for President Andres Manuel Lopez Obrador to offer concessions on the border issue.
“When you are the ‘Piggy Bank’ Nation that foreign countries have been robbing and deceiving for years, the word TARIFF is a beautiful word indeed! Others must treat the US fairly and with respect – We are no longer the ‘fools’ of the past!,” the president tweeted.
He followed that up with tweets on June 2nd: “People have been saying for years that we should talk to Mexico. The problem is that Mexico is an ‘abuser’ of the US, taking but never giving…. for decades. Either they stop the invasion of our Country by Drug Dealers, Cartels, Human Traffickers…Coyotes and Illegal Immigrants, which they can do very easily, or our many companies and jobs that have been foolishly allowed to move South of the Border, will be brought back into the US through taxation (Tariffs). America has had enough!” The last tweet’s acknowledgment that tariffs are taxes was particularly attention grabbing because
- It is not something the president previously admitted, and
- The president’s sentiment that private companies have been “allowed” by the government to choose where to locate links his views to those of his predecessor, who in a 2012 campaign speech extolled government over the private sector by saying “If you’ve got a business—you didn’t build that.” Contrary to both presidents, the founding idea of the US republic is that government is “allowed” by the people, not the reverse.
Cars, fruit, and a presidential contradiction
As many pointed out, the integration of the US with Mexico, which recently surpassed China to become the largest US trading partner, is so complete that the new tariffs would immediately slam the US economy. This has not gone unnoticed by the equity markets. If Trump’s new tariffs against Mexico take effect it will put the US is in a trade war with its two largest trading partners — while possibly heading into a war over auto trade with Japan and the EU.
When a car, for example, is made in North America, it normally crosses the US southern border up to eight times. The finished model assembled in Mexico contains about 40% US content. Imposing tariffs at each trip back to the US could devastate the auto sector and other manufacturing. Similarly with many fruits and vegetables. As much as half of US consumption originates in Mexico so that food processing companies, retailers, restaurants, and others would take a big hit. And this is without considering the damage that retaliatory tariff actions by Mexico would exert if levied.
Making clear that his new action is not entirely about immigration but also relates to his trade policy, the president’s tariff announcement says, “If Mexico fails to act, Tariffs will remain at the high level, and companies located in Mexico may start moving back to the US to make their products…. Companies that relocate to the US will not pay the Tariffs or be affected in any way…. Over the years, Mexico has made massive amounts of money in its dealings with the US, and this includes the tremendous number of jobs leaving our country. Should Mexico choose not to cooperate… the sustained imposition of Tariffs will produce a massive return of jobs…. Remember, our great country has been the ‘piggy bank’ from which everybody wants only to TAKE. The difference is that now we are firmly and forcefully standing up for America’s interests.”
Thus the President is saying that he wants his policy to lead to re-shoring of production back from Mexico to the US, implying that he’d welcome companies that invest in the US. But just two weeks ago he issued a different proclamation in which he targeted the US-based manufacturing facilities of foreign-brand automakers as a national security threat. This broadcast the view that foreign investors in the US are not welcome here despite their job-creation. Consistency has not been a presidential strong point.
The Democrats’ role in the border crisis
The President’s statement noted that “Democrats in Congress are fully aware of this horrible situation and yet refuse to help in any way, shape, or form…. The migrant crisis is a calamity that… can easily be solved—in Congress…. When that happens, the measures being announced today can be more readily reduced or removed.”
The weekend edition of the Wall Street Journal agrees but with two important qualifications:
Mr. Trump is blaming Mexico for a mess it can’t solve. The real cause of the recent border chaos is the lure of U.S. asylum policy. Migrants from Central America know that if they cross the border illegally with children they can’t be detained for more than 20 days. They are then released into the U.S. where they can work for years until their asylum hearing date, and most never show up.
Mr. Trump is right that Democrats refuse to help, but then why change the subject to Mexico?…Blaming Mexico is a distraction that lets Democrats off the hook.
President Trump’s move was particularly stunning because it quickly followed the removal of the Section 232 tariffs on Mexican and Canadian steel and aluminum, which most observers thought he did in order to ease the way for ratification of the USMCA in all three countries. Slapping new tariffs on Mexico could put ratification out of reach in the US and Mexico, denying the President a victory on what he has claimed is his top legislative priority. It appears he sees the immigration issue as politically and ideologically more important, though he clearly welcomes the trade impact of the new tariffs.
Division within the executive branch
There were myriad press accounts reporting that almost all of the President’s advisers opposed the new tariffs and tried to talk him out of them – including USTR Lighthizer, who has been working hard to win Democratic support for USMCA, and Treasury Secretary Steven Mnuchin. Pushing the tariffs were immigration hard-liner senior adviser Stephen Miller and trade adviser Peter Navarro.
Acting White House Chief-of-Staff Mick Mulvaney during a June 2nd t.v. interview stressed that the president wasn’t making an idle threat but “is absolutely, deadly serious. I fully expect these tariffs to go on to at least the 5% level on June 10th” because he “is deadly serious about fixing the situation at the southern border.” He also said the new move shouldn’t harm USMCA’s prospects since the tariffs relate to immigration rather than trade and the two are “not interrelated.” Mulvaney dismissed the “economic orthodoxy” that tariffs are economically harmful and insisted that “American consumers will not pay for the burden of these tariffs” but they do already pay “hundreds of billion dollars” for undocumented immigrants.
Bloomberg today, however, headlines that “U.S. Factory Gauge Falls to Lowest Level of Trump Presidency” and adds that
A measure of U.S. manufacturing activity unexpectedly fell in May to the lowest level since October 2016, in a sign President Donald Trump’s trade war with China is weighing on the economy as he considers further tariffs…. Producers, who already faced headwinds from slowing global growth and inflated inventories, may face additional fallout after Trump’s threat last week to impose tariffs on all imports from Mexico.
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