After President Donald Trump released a statement announcing his intention to impose a progressive tariff on all goods imported from Mexico starting June 10—and escalating another five percent per month until October 2019 unless Mexico stops the flow of undocumented migrants at the U.S. southern border—senior leaders from the Mexican government, as well as Republican and Democrat members of Congress have scrambled to avoid the start of another trade war that would exacerbate the humanitarian crisis at the border, hit U.S. consumers with higher prices and jeopardize the U.S.-Mexico relationship.
To address what President Trump wrongly calls “an invasion” from Central Americans fleeing violence and transiting through Mexico, the White House plans to impose the tariffs invoking the International Emergency Economic Powers Act (IEEPA), an instrument that grants the President authority to deal with any unusual and extraordinary foreign threat. Past administrations have invoked IEEPA to enact sanctions against countries like Iran to address the 1979 hostage crisis, or more recently denounce human rights abuses in Nicaragua by Daniel Ortega’s government. Does it apply though to Mexico, the U.S.’s ally and close trade partner?
According to Edward Alden, Senior Fellow at the Council on Foreign Relations, IEEPA has never been used against a close ally or a trading partner like Mexico. IEEPA does not define what qualifies as an unusual and extraordinary threat, “unless Congress avoids a further overstepping of Constitutional power; there is really nothing to stop [President Trump from] declaring an emergency on anything he wishes” says Alden.
This is the second time President Trump targets Mexico in a national emergency declaration, following the national emergency declaration issued after Congress refused to fund a wall along the U.S.-Mexico border earlier this year, taking by surprise the Mexican government that just last week submitted the recently negotiated United States-Mexico-Canada Agreement (USMCA) for Senate approval. Since the announcement, a delegation appointed by Mexican President Andres Manuel López Obrador and led by Foreign Minister Marcelo Ebrard rushed to Washington to engage in negotiations with their U.S. counterparts to avoid the passage of the tariff plan next week.
Numerous media outlets, commercial chambers, think tanks, and former U.S. and Mexico government officials—including seven former U.S. Ambassadors to Mexico—have raised the alarm on the negative outcomes of a five percent tariff on U.S. consumers, the fate of the USMCA and the multifaceted partnership built between these two neighboring countries for the past decades.
Mexico is currently the U.S.’s third largest trading partner (though in 2019 Mexico swelled to the U.S. largest trade partner) and the U.S. is Mexico’s largest partner. According to the Office of the United States Trade Representative, trade between the U.S. and Mexico totaled an estimated $671 billion in 2018; with exports totaling $299.1 billion and imports accounting for $371.9 billion.
The Perryman Group—an economic analysis firm based in Texas—estimates that Trump’s proposed tariffs would lead to increased economic costs in trade that when considering multiplier effects, would take a high toll on the U.S. gross domestic product (GDP), personal income and overall permanent job losses. According to Perryman Group’s calculations, a five percent tariff on all imports coming to the U.S. from Mexico would lead to an increase in direct costs to U.S. consumers and businesses of about $28.1 billion each year. And after considering the multiplier effects, the net losses to the U.S. economy include an estimated $41.5 billion in GDP and $24.6 billion in personal income each year, with overall job loss of about 406,000.
According to Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, “a five percent tariff on about $360 billion percent worth of imports, spread across 100 million households, equals $180 for every American family in a year. If the tariffs gradually increase to 25 percent, that is $900 for each household in a year.” Goods such as fresh produce, including tomatoes, cauliflower, and lettuce; beer, [such as] Mexican beer like Corona and Modelo; data processors; telephones; and televisions, will all be affected by Trump’s tariffs
But most important is that a significant proportion of U.S.-Mexico trade does not come in the form of final goods, but through supply chains. And on this, President Trump’s tariffs place a disproportionately large burden on the manufacturer in the form of escalating production costs as semi-final and final goods go back and forth across the border, with varying degrees of shocks per industry. And in this context, no sector will be more affected than the auto industry.
Car cost
The auto industry has been the clear winner in deepening economic ties between the U.S. and Mexico. Through USMCA’s predecessor, the still-valid North American Free Trade Agreement (NAFTA), the industry has been able to develop vertical supply chains along the U.S.-Mexico border. As a Congressional Research Services report on U.S.-Mexico economic relations notes, “The flow of intermediate inputs produced in the United States and exported to Mexico and the return flow of finished products greatly increased the importance of the U.S.-Mexico border region as a production site.” In the case of automobile production, a car will travel across the border at least eight times as parts or subassemblies throughout its production life.
According to the Center for Automotive Research, 16 percent of parts used in U.S. assembly plants come from Mexico, including 70 percent of critical wire harnesses. Approximately 40 different models of cars are built in Mexico, totaling an expected 2.7 million units in 2019. In 2018, out of total imports to the U.S. from Mexico, completed vehicles and auto parts from Mexico accounted for 25 percent, or $93 billion, while vehicle and parts to Mexico amounted to seven percent of the total, equal to $22 billion.
Trump’s announcement couldn’t have come at a worse time; car sales in the U.S. are expected to decline, from 56 percent in 2016 to a projected 53 percent this year. According to LMC Automotive, an automotive forecasting company, if the five percent tariff is imposed and lasts a month, the automotive industry could see an average $1,700 price increase on the models and parts imported from Mexico. A sustained 25 percent rate would have a devastating effect with models imported from Mexico increasing in price by an average of $8,500. When factoring in parts for assembly in the U.S., the average price of all vehicles sold in the country could rise as much as $2,500 to $3,000. A 25 percent tariff on all imports from Mexico would add about $28 billion a year to the cost of completed vehicles and parts.
If tariffs are enacted, the auto industry (and others) will be forced to choose from a “lesser of evils” options such as completely shifting their lines of work incurring in the costs of doing so, reducing or shutting down total production resulting in less options in the market for U.S. consumers, or passing the tariff burden to U.S. consumer prices, potentially reducing demand for autos in general. In the end, both producers and consumers lose. In short, despite Trump’s claims, his tariff/taxes on U.S. citizens won’t bring jobs back to the U.S., they will reduce employment.
Mexico’s response
Although the Trump administration has been vague about what steps Mexico would need to take to prevent the tariffs, Mexican officials report an average of 877 undocumented migrants stopped per day, sending 80,000 home over the past six months. And barely two weeks ago, Mexican Foreign Minister Marcelo Ebrard met with Trump advisor and son in law, Jared Kushner, to discuss Mexico’s Central America Development Plan to address the root causes of migration in the Northern Triangle.
The delegation of Mexican officials in Washington D.C. this week has tried to avoid confrontation. Instead it has pointedly expressed interest in continuing to work with the U.S., the international community and the Northern Triangle to assist the three countries in reducing forced migration.
But while the outcome of talks between U.S. and Mexico leadership this week is still uncertain, and while U.S. Congress rallies to prepare a response to the emergency declaration, as Trump keeps sending mixed and hostile [Twitter] messages, the truth is the U.S -Mexico relationship is being tested to the limit, tempting the Mexican government to overturn the conciliatory approach President López Obrador has adopted so far.
The potential harm on the U.S. economy as a result of imposing tariffs on Mexican imports will quickly spiral downwards if Mexico in turn retaliates and imposes tariffs on U.S. goods. Shannon O’Neil, senior fellow for Latin America Studies at the Council on Foreign Relations, notes that Mexico could even target products from swing states or states Trump barely won during the 2016 elections, ahead of the 2020 presidential campaign. O’Neil also mentioned that Mexico could decide to respond with non-tariff measures such as suddenly overturning any effort to curb migration on Mexican soil, an extreme but very real measure the government could take.
In a press conference along with Foreign Minister Ebrard, Mexico Ambassador to the U.S. Martha Bárcena did mention that, although the negotiating party has “faith in dialogue and politics as a means to avoid a costly and unnecessary confrontation, Mexico’s willingness to negotiate has a limit if and when Mexican dignity is crossed.” Economy Minister Graciela Márquez separately declared that in case the U.S. and Mexico fail to reach a diplomatic solution, her team would evaluate how Mexico could retaliate. When that will break is unclear.
America First? Not so much
Trump’s move has enlarged a crack within the Republican Party that traditionally has advocated for free trade and low taxes. Representatives on both sides of the aisle coordinating to strongly oppose Trump’s tariffs as a solution to a non-commercial issue. According to the Washington Post, Congressional Republicans have floated the idea of vetoing President Trump’s planned tariffs on Mexico, on the basis of using executive powers to circumvent Congress.
President Trump’s tactic of using tariffs as a negotiating chip is flawed. For the past year or so, the U.S. has been in a trade war with China after his administration imposed tariffs on $250 billion worth of Chinese goods, and there seems to be no end in sight. And although Trump claims the Chinese are paying the U.S. Treasury billions of dollars due to the tariffs, these claims are not true. In fact, tariffs on Chinese goods are hurting Americans. Add to this Trump’s reckless tariffs on Mexican imports, and the most-affected will continue to be Americans.
