6 things to know about Trump’s Mexico tariffs

A truck drives next to the border fence while waiting in a long queue for border customs control to cross into the U.S., at the Otay border crossing in Tijuana, Mexico April 4, 2019. REUTERS/Carlos Jasso - RC12300AE540

Thursday evening, the Trump administration announced a new plan to increase tariffs on imports from Mexico. On June 10th, the U.S. will begin implementing a 5 percent tariff, which will increase to 10 percent on July 1st, and then increase by an additional 5 percent each month after that up to 25 percent. The tariffs will remain in place “unless and until Mexico substantially stops the illegal inflow of aliens coming through its territory.” It’s not clear what specific steps the U.S. would like Mexico to take, but it seems extremely unlikely the Mexican government could immediately end unauthorized immigration through its country.

Here are six things to know about this announcement:

1. It might not happen.

While in office, Trump has repeatedly announced dramatic changes to trade policy and then subsequently abandoned, postponed, or watered down their implementation. That could happen again this time. The wording of the announcement leaves full discretion to the administration to determine if Mexico is complying, so in practice it could decide at any point to abandon these tariffs. Yet, since this policy links two of Trump’s signature issues, trade and immigration, it may be more difficult for White House advisers to talk Trump out of it. Even if Trump doesn’t ultimately follow through, the uncertainty itself is damaging—companies that depend on this trade can’t afford to just wait and see if Trump will back down.

2. If it does happen, it will be costly—for both Mexico and the United States.

About 80 percent of Mexico’s global exports go to the United States, most of which currently enter the U.S. tariff-free under NAFTA. The full 25 percent tariff would significantly harm this trade. While exchange rate adjustments may cancel out some of the effects—the peso immediately dropped about 3 percent versus the dollar after the policy was announced—Mexican exporters will still be searching for new markets. Meanwhile U.S. importers—who will actually be paying the costs of these tariffs—will similarly be hurt. Indeed, given the regional value chains that exist around the U.S.-Mexico border, where production processes often involve intermediate inputs moving back and forth across the border several times before the final product reaches the consumer, these tariffs will be especially costly to U.S. importers. To date Trump’s protectionist trade policies, while harmful to individual companies, have had only limited effects on the overall U.S. economy, which remains strong. A 25 percent tariff would ripple through the broader U.S. economy.

3. It’s going to upend Trump’s efforts to ratify the U.S.-Mexico-Canada trade agreement (USMCA).

One of Trump’s top legislative (and 2020 campaign) goals this year has been getting USMCA ratified. After some stalling, there has been some movement toward this goal in recent days: Both Canada and Mexico had taken steps to introduce the necessary implementing legislation, and the Trump administration has been pushing Congress to do the same. It is extremely difficult to imagine Mexico following through with USMCA while this policy is in effect. The policy is also going to be hated in Congress (by Democrats and many Republicans), and there’s very little chance they’ll approve of USMCA under these terms. Perhaps the Trump administration had already concluded the odds of the Democrat-controlled House ratifying USMCA were slim, or maybe the ultimate goal is to abandon these new tariffs as part of a bargain to get USMCA through. But at least in the immediate term, the new Mexico tariffs are going to undercut one of Trump’s core priorities.

4. It further blurs the line between trade and national security.

One of the broader shifts in trade policy that Trump has overseen is using national security concerns to justify policies that limit international economic integration. While security concerns have always affected trade policy in some specific cases—for instance, the U.S. has long controlled exports of goods that might be used for military purposes—the Trump administration has significantly expanded this practice. It has cited national security considerations in placing tariffs on steel and aluminum, encouraging stricter reviews of foreign investment, and blocking American companies from transacting with the Chinese telecommunications company Huawei. Additionally, the administration is currently debating new tariffs on autos and auto parts for national security reasons. The Mexico tariffs are ostensibly needed to protect American security by punishing/pressuring Mexico into action on immigration, but the White House statement announcing them makes clear Trump also thinks the tariffs will benefit the U.S. economy. The more the Trump administration stretches the limits of what might plausibly be valid national security concerns into mere protectionism, the more difficult it will find it is to defend legitimate national security interventions in trade policy.

5. It could signal a significant escalation in U.S. protectionism.

Trump came to power with a decades-long record of supporting tariffs and protectionist policies. In office, while he’s repeatedly threatened such policies, for the most part he hasn’t followed through, perhaps because others in the administration have managed to restrain him. But if these Mexico tariffs are implemented, it could suggest that whatever constraints have so far kept Trump from fully embracing his protectionist instincts have worn out. If so, the wheels could quickly come off U.S. trade policy, as there is a long list of ideas Trump has floated but backed away from, including the pending implementation of a 25 percent tariff on all autos and auto parts, all-out trade war with China, withdrawing from NAFTA, or even withdrawing from the WTO.

6. It shows foreign leaders not to trust the Trump administration.

Both the current and the previous Mexican administrations have managed their relationship with Trump assiduously, largely avoiding responding to his insults, navigating the complex renegotiation of NAFTA, and finding some ground for cooperation on immigration issues. In return, Trump responded with a policy designed to cripple Mexico’s economy, demanding vague policy outcomes that will be almost impossible to meet. The clear lesson for Mexico and all other governments is that striving in good faith to work with this administration does not protect you from Trump’s nationalist whims. At this point most governments around the world were probably already looking to 2020 and merely hoping to wait out the Trump administration. But this will reinforce the lesson that the Trump administration is not a reliable negotiating partner, and that there is little to be gained in trying to cooperate with it.