Going rogue on trade

There is no justification that allows a government to raise tariff levels based on immigration levels.

To take such a step means that the United States has decided that it will no longer bound by international trade rules. 

The early commentary on the Mexico decision has been nearly entirely focused on which companies in which sectors will be most at risk from an increase in tariffs by 5% on June 10, with additional increases monthly afterwards until every inbound product faces 25% tariffs by October 1.  Such a damage assessment is important for firms that suddenly awoke to find themselves in the front lines of a new trade conflict that they did not anticipate.

But it misses the larger point—everyone is affected by this decision.  It is not just companies that ship goods from Mexico to the United States that should be paying attention. 

If the US proceeds down this path, it is the end of the global trade regime that has given stability and lowered risks for an increasingly larger share of companies and consumers since the 1940s. 

Trump is claiming the right to act on the basis of a 1977 domestic law called the International Emergency Economic Powers Act (IEEPA).  [The always-helpful Congressional Research Service has a review of the law here.]  This law has typically been used for sanctions actions by US Presidents. 

Trump is arguing that migration from Mexico now constitutes an emergency.  Ignore, for now, the evidence to support or refute this claim.  Of perhaps greater importance to the trade and economic community, the IEEPA does not grant the President the right to raise tariffs for such a purpose. 

The US constitution grants the right to regulate trade specifically to Congress, although the legislative branch has typically allowed the executive branch significant latitude to maneuver in the space.  Even the broadest possible view, however, does not suggest that Congress intended to grant the President the ability to adjust tariff preferences through the IEEPA.

But even if the IEEPA allowed the use of tariffs as a tool to manage economic emergencies, and if migration from Mexico could be viewed as an economic emergency, there is still no legal justification to use tariffs to solve this threat at the global level.

Allowing the United States to claim such a chain of logic is justified would let any country basically use any excuse for raising tariffs on trading partners. 

The whole point of crafting legally binding commitments on tariff reductions was to ensure that members would not simply raise tariffs whenever they felt like it. 

Such commitments have been picked up and repeated in regional and bilateral trade arrangements.

Mexico has just discovered, however, that such commitments by the United States are apparently not binding after all.  Neither World Trade Organization (WTO) commitments or North American Free Trade Agreement (NAFTA) promises matter.  Trump can apparently unilaterally decide to lift all tariffs in 10 days over a non-trade issue.

This raises the issue of why Mexico—or any other country—would want to sign any agreement with the United States. 

A revised version of NAFTA is currently pending, with growing momentum in Washington to get the agreement passed during the summer.  Canada just took up the first elements of the new NAFTA in their own domestic legislative process.  Mexico has also been grappling with implementing a series of internal reforms to allow the new agreement to come into force.

Now, however, both countries will surely rethink the point of signing an agreement with such a mercurial partner. 

The Mexico tariff issue also throws the US-China trade war into greater uncertainty.  Why, Chinese leaders must surely be thinking, would they agree to sign a new deal with Trump if he might turn around and “do a Mexico” with them shortly afterwards? 

The conclusion of the new NAFTA did not stop Trump from raising new concerns with Mexico, including the imposition of tariffs on steel and aluminum (just dropped), and now across-the-board tariffs on every single product over pique on migration. 

There is such a long list of issues between the US and China that are likely to crop up in the near term, that there will be opportunities to “do a Mexico” every week, should Trump decide he wants to do so.  Even if the latest trade conflict were resolved with China, it could easily flare again tomorrow over a new technology company, a slide in the stock market, a specific patent infringement problem, a surge in the imports of apples or zippers, or an issue with the latest batch of Trump ties.

Japan and Europe should also be watching with increasing alarm.  In addition to worries over the future of the global trading system, both countries are currently in Trump’s cross hairs over auto exports, which have already been deemed to be a threat to US national security.  Trump has—in his hands already—a report that gives him the authorization he needs to impose tariffs of up to 25% across-the-board on all autos into the United States from both trading partners.

Trump has given both countries reprieve of up to 180 days, pending successful progress towards bilateral trade talks.  Since he gets to decide on the metrics for success, the result could easily be a deeply problematic outcome for both Japan and the EU.

Many have been willing to grant Trump the benefit of the doubt on trade.  His disruptive methods have been seen as part of a larger plan to achieve a recalibration of trade goals. 

Such disruption and recalibration are part of the grand strategy.  As he has said from the beginning, his objective is to “Make America Great Again.” 

Unfortunately, as his actions have demonstrated ever more clearly, such decisions also concurrently raise the costs for everyone else.  Trade and tariff tools can—and apparently will—be wielded for whatever purpose Trump sees as legitimate.