Against the Mexico Tariffs

National Review Online

Saturday, June 01, 2019

President Trump believes, not without good reason, that the Mexican government is not doing its utmost to stop the illegal flow of Central Americans crossing the U.S. border. And so he has responded with . . . a $17 billion–a–year–and–rising sales tax on Americans.

The president loves tariffs. He believes that they are an effective means of protecting American firms from unfair overseas competition and a good negotiating tool as he works to reform trade agreements that he believes are disadvantageous to Americans. But the question of who ends up actually paying any given tax is complicated. The price of those tariffs, and the retaliatory tariffs they have provoked, is very high for American companies: For example, the tariffs Beijing imposed in response to Trump’s have cost American farmers an enormous part of their export market (half of exported U.S. soybeans used to go to China; the tariffs have been a gift to Brazilian producers), but the U.S. tariffs themselves are an enormous problem, too. Many American manufacturers import raw materials and components from abroad, and complex products such as automobiles and electronics may cross the border several times in the course of production.

A 5 percent tariff on Mexican goods would notionally amount to about $17 billion on U.S. imports from Mexico, touching everything from industrial components to fruit and crude oil. In reality, it is difficult to say how much money would be raised, because buyers respond to tariffs in unpredictable ways. In any case, many of those costs will be borne by American consumers and — this cannot be emphasized enough — American businesses that rely in some part on imported inputs. More important, it would cause uncertainty around a North American supply chain that has evolved organically over many years as the result of enormous investment by American companies and their business partners.

President Trump envisions a tariff that will potentially ratchet up to 25 percent.

The president here is unnecessarily complicating his own life. He has just overseen the successful renegotiation of NAFTA, which will be reconstituted as the U.S.–Mexico–Canada Agreement (USMCA). But that agreement has not yet been ratified — not by the United States, and not by Mexico. Imposing punitive tariffs over a policy dispute unrelated to trade five minutes after negotiating a new trade pact makes the Trump administration — and the United States — look like an unreliable negotiating partner. Mexico is not wrong to resent it, and even Trump allies such as Senator Chuck Grassley (R., Iowa) are against him on this.

Also, it’s a good rule of thumb to fight one trade war at a time. If the administration, correctly, wants to focus on China’s malign trade practices — and not just during the current dispute but over the long term — it needs good trading relationships with its allies, especially here in North America.

Illegal immigration from Mexico and Central America is a significant problem, and President Trump did well to put it at the center of his agenda. Many of the policies he has proposed — walls, increased enforcement, changes in asylum policy — are worthwhile and would likely prove effective if implemented. But Congress isn’t interested in passing them, which has left the president to grasp for unilateral ways to solve the border crisis. Some of these are politically unsustainable or of dubious legality, e.g. the zero-tolerance policy and the unilateral spending under the emergency declaration.

Mexico has played ball with Trump on immigration policy more than anyone would have expected at the outset of his presidency, but there are limits to the Mexican government’s effectiveness and its willingness to subordinate its interests to ours. Ideally, we’d get Mexico to sign a “safe third country” agreement. That would allow us to exclude asylum-seekers who transit through Mexico on the basis that they should be applying in Mexico instead. Of course, Mexico has no incentive to make it possible for asylum-seekers to stay there instead of enabling them to quickly move on to the United States.

If Trump’s tariff threat gets Mexico to sign such an agreement, we will be the first to congratulate him on his successful brinkmanship. But it is more likely that Mexico will make some assurances that will be enough to get Trump to relent, while not changing anything fundamental on immigration.

The worst-case scenario is getting no action from Mexico whatsoever and the imposition of spiraling, disruptive tariffs, whose costs will in fact fall, to a great extent, on Americans.