Mexico solved? Not so fast...significant damage remains

To recap, seemingly out of nowhere, on May 30, US President Donald Trump threatened to apply five percent across-the-board tariffs on all products imported from Mexico, starting on June 10, if Mexico remained unable to made sufficient progress on resolving the migration crisis into the United States. 

Trump’s immigration concerns are long-standing, but the timing of this particular tweet-fest was unusual.  His Vice President was in Canada promoting the passage of the updated North American Free Trade Agreement (which goes by a different acronym in each of the three parties).  The Canadians and Mexicans had both literally just put the agreement into their respective domestic legislative processes for approval.

Trump acted over the apparently strong objections of his own staff members, who argued that imposing tariffs would torpedo approval of the new NAFTA, would lead to significant economic costs, would damage the market, and could cause additional longer term challenges.

Nevertheless, Trump took the gamble and it has apparently paid off handsomely for him.  In the short run, he has accomplished the following: 

1)    Looked strong on his signature issues of both immigration and trade

2)    Accomplished his objectives on immigration—Mexico has agreed to make a series of changes to address what Trump wants to slow border crossings (regardless of when such commitments were made)

3)    Sidelined his own staff members, in both the initial decision and in the negotiations where talks were held without trade officials present

4)    Showed that Congress will not move against him, even when he makes dubious connections between migration, national security and trade, and even when he appears to override Congressional prerogatives on trade (as this previous Talking Trade noted)

5)    Managed to drive down the value of the Mexican peso, making imports cheaper into the United States (probably not an intended objective, but an interesting consequence)

6)    Distracted the audience from a wide range of other issues that might otherwise have captured attention

7)    Ensured that he remained the focus, even when he was overseas in Europe

 The net result, for Trump, is that he did what he wanted and it worked. 

Flush with this victory, it is highly likely that Trump will double down on his strategy in the future.  After all, he will reason, his advisors argued against his Mexico gamble and yet it paid out so well for him.  Why, then, should he listen to them if they advise against similar trade and tariff policies again?

Trade is now a tool to be used for non-trade objectives, as we have noted previously.  While clearly illegal, such a distinction does not matter.  Trump was willing to impose tariffs on Mexico in direct contravention of existing World Trade Organization prohibitions, NAFTA rules and the upcoming NAFTA 2.0 rules.  He used a dubious interpretation of the American emergency powers act to justify his decision domestically. 

The gloves, so to speak, are clearly off.  And, having won a big match in this way, there is every reason to believe such tactics will be tried again.  Future opponents should be forewarned. 

This is the problem with Mexico’s resolution.  Ironically, Trump may have won the battle but lost the war (to keep using metaphors).  He succeeded in pushing Mexico, but he is less likely to win with more formidable candidates.

Note that Mexico did not have tariffs removed over migration.  They were “suspended indefinitely.”  This means that they can be reapplied at any point in the future when Trump believes it is in his interest to do so.

The EU, Japan and China should be extremely wary.  The first two parties have problems over autos, the latter, of course, has issues nearly everywhere with the Americans. 

The Section 232 cases with autos are currently also “suspended” for up to 180 days pending sufficient progress on broader trade agreements with both the EU and Japan. 

The Americans and Chinese are arguing over the Section 301 resolution over unfair trade practices.  Market watchers are hoping that Trump and Chinese President Xi will patch things up if they manage to meet on the sidelines of the G20 meeting in Japan at the end of this month.

Now that Trump is going to use trade tools for all manner of perceived “violations” or problems, what is the point of taking negotiations seriously?  If having existing agreements does not constrain his behavior, why have new ones?  What will a new document accomplish that existing rules will not? 

These were questions that probably always weighed on the minds of foreign government officials dealing with Trump.  He has relished the opportunity to do things differently and has brandished tariffs, especially, like no other leader.

Mexico shows that Trump will not be bound by any past norms or laws of behavior.  This is much more damaging than previous actions on steel or aluminum or even the use of Section 301 against China.  All these decisions could be justified (at least loosely) under existing rules.

Mexican tariffs for migration cannot. 

It is therefore an open question whether major players like the EU, Japan and China can (or even should) continue to negotiate “in good faith” with this administration. 

This is, clearly, a deeply painful sentence to even write.  But it is hard to take seriously a team that argues that anyone else should uphold the rule of law and follow global norms when it is seen to be breaking both. 

Mexico could be a one-off example, of course. 

The United States has claimed that unusual times require unusual measures and that past rules and procedures are in dire need of new directions. 

Such statements can be true and yet should not be a license for breaking the global system. 

If Trump uses Mexico as a pattern for the future, it will be much more problematic than anyone might have realized just two short weeks ago.