Should the Trump Administration’s threats to impose a 20 percent tariff on US imports from Mexico be treated as a serious policy proposal or simply bluster and part of a power play? It’s hard to say. No sooner had it been announced than Press Secretary Sean Spicer said that the proposal was simply “one idea” in “a buffet of options” to get Mexico to pay for the wall. Nonetheless, either as policy or bluster, such a measure could prove counter-productive and extremely damaging to both economies and the global trading system as a whole.
Production in Mexico and the United States is intertwined. Parts and components for key industries such as automobiles, aerospace, electronics, and apparel often cross the border in both directions several times before final assembly. The tariff would severely disrupt these production chains, doing damage to investment and jobs in both countries. Employment in the very states and manufacturing industries Mr Trump has pledged to boost would be adversely affected. Moreover, foreign autos and other imports that are not assembled in these supply chains would now be more competitive.
The U.S. threat to impose a discriminatory tariff against Mexico also establishes it as a scofflaw that is willing to break its international legal commitments. The threat not only violates the NAFTA Agreement, but represents a dagger in the heart of the World Trade Organization. The WTO works through commitments by its members to keep their tariffs below pledged rates and not to discriminate among WTO members — so called most favored nation treatment. Border taxes on just one member way in excess of U.S. pledged maximum rates obviously violate these commitments.
President Trump claims he wants to renegotiate our trade agreements to make them fairer for the U.S. It is one thing to follow the rules required for renegotiation, but quite another to violate U.S. legal obligations for short-term political advantage. Indeed, if the President simply tears up previous agreements, why should others trust his pledges in the future? What would rules mean in a world in which the U.S. president is constantly seeking to get a better deal?
Since the 1930s the US has played a leadership role in establishing a trading system based on rules. If the leader now breaks these rules, it is likely that other countries will lose faith in the WTO and feel freer to emulate U.S. behavior. If members feel free to raise trade barriers on each other, there could be dire consequences not only for U.S. exporters but also for a global trading system that has lifted billions out of poverty.
There is also the irony that while the tax on Mexican imports can be presented as making Mexico pay for the wall, a significant share of the tariff will be passed through into higher U.S. prices, thus actually resulting in U.S. consumers paying for the wall. It is also possible that instead of this proposal, taxes on Mexican imports could be part of a more radical proposal currently being floating by Republicans in the Congress for corporate tax reform. This plan would involve radically lowering corporate taxes. It would also involve border tax adjustments of questionable WTO legality. Imports would be taxed by disallowing them as an expense, while taxes on U.S. exports would be eliminated. If this plan is adopted, it would be U.S. taxpayers rather than Mexicans who would pay for the wall!
Donald Trump is a master manipulator of public opinion and the optics of imposing tariffs on Mexican imports will look good to his supporters. For him the political victory of building a wall and having Mexico appear to pay for it will be all that counts. He may also prove to be effective at intimidating U.S. firms with tweets and bribing them with lower taxes. But ultimately, trade policies based on deals and short-term political advantage will not only damage U.S. relations with Mexico and our other trading partners, but fail to enhance the employment or living standards of the working classes that elected him.