Report

Trump Sours Relations With Mexico After Tariff Talk

Vague plans for an import tax would shift the cost of the wall to U.S. consumers and hurt key parts of the U.S. economy.

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The Trump administration’s ill-defined quest to make Mexico pay for the border wall through some sort of tariff has sown confusion in both countries, threatens two-way trade, and has deeply soured relations in Donald Trump’s first week in the White House.

On Thursday, after Mexican President Enrique Peña Nieto abruptly cancelled a planned trip to Washington, Trump aired vague threats on Twitter hinting at a large tax on Mexican imports. White House press secretary Sean Spicer later waded into the fray, suggesting a tax or tariff along the same lines, similar to a plan under consideration by House Republicans.

Spicer couched the idea not as part of readjustment of trade policy toward Mexico, but rather as a way to raise money to offset the cost of building a wall along the border.

“We’ve been asked over and over again, ‘How could you possibly do this? There’s no way that Mexico will pay for it.’ Here’s one way. Boom. Done. We could go in another direction. We could talk about tariffs,” Spicer said.

At a press conference Friday with British Prime Minister Theresa May, Trump said that he spoke for an hour with Peña Nieto, and had an “excellent” conversation. But the two have apparently not buried the hatchet. Trump repeated complaints about U.S. trade with Mexico, saying it had “outnegotiated” the United States and “has beaten us to a pulp.” He did not offer any more details on the notion of a tax or tariff, and the White House did not respond to requests for clarification.

The administration seems to believe that a border tax or tariff — either of which would likely be challenged under current trade rules — would be borne by Mexico, to help defray the cost of Trump’s $20-billion odd border wall. Trump has repeatedly vowed to make Mexico pay the for wall, though current and former Mexican presidents have made clear it never will.  But U.S. consumers, not Mexico, would of course pay the higher cost of imports.

“The claim that the Mexicans are going to pay this tax and Trump will use this to build the wall is ridiculous,” Michael Davis, an economics professor at Southern Methodist University in Texas, told Foreign Policy. “It will not be the Mexicans who will be paying the tax, it’s the Americans.”

The spat has plunged U.S.-Mexico relations into a tailspin, even as Trump’s hand grenade diplomacy has frightened allies in Asia and terrified NATO partners in Europe. Mexican daily Excelsior, for example, highlighted the “rapid deterioration in just one day” of relations between the two countries, while former Mexican President Vicente Fox told Trump to “grow up.”

Importantly, the bellicose talk on trade, including the promised renegotiation of the North American Free Trade Agreement and some kind of border tax or tariff, threatens cross-border trade that is crucial to the American manufacturing economy, one sector that Trump says he wants to help.

Mexico is the United States’ third-biggest trading partner, with a two-way trade worth about $1.4 billion every day. But the reason that trade has grown so dramatically in the twenty years since NAFTA came into effect is because companies have created supply chains with operations on both sides of the border, which makes manufacturing more efficient and companies more competitive.

Much of the two-way trade is in automobiles and automotive parts, but other U.S. sectors also have supply chains that reach across the border. “U.S. manufacturing industries, including automotive, electronics, appliances, and machinery, all rely on the assistance of Mexican manufacturers,” the Congressional Research Service noted in a recent report.

A huge chunk of U.S. imports of goods from Mexico consists of goods originally exported from the United States as part of the manufacturing process. All that means that any increase in the cost of cross-border trade will make U.S. companies less competitive globally, and would likely lead to job losses. “It will make production much more expensive and much less efficient,” Davis said.

And a tax or tariff will also disproportionately affect U.S. states near the border, such as Arizona and Texas. The White House’s vague plan drew immediate fire from Sen. John McCain (R.-Ariz.), who said “the free flow of trade has been the foundation of U.S. economic policy for decades, and a major factor in our prosperity and greatness.”

Sen. Lindsey Graham (R.-S.C.), for his part, zeroed in on the potentially higher cost of Mexican foodstuffs after a tariff.

“Simply put, any policy proposal which drives up costs of Corona, tequila, or margaritas is a big-time bad idea. Mucho Sad,” he tweeted.

Photo credit: Getty Images

David Francis was a senior reporter for Foreign Policy, where he covered international finance. @davidcfrancis

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