Mexico gets needlessly drawn into a trade war

The Trump administration has sent a message to the world with its new tariff threats against Mexico: No deal is ever a done deal.

That effect may be bigger than the immediate 5 per cent tax on Mexican imports set to go into force June 10 and escalate to 25 per cent over time. Mexico had seemed to resolve its trade tension with the US, in the form of a reworked NAFTA now known as the United States-Mexico-Canada Agreement, or the USMCA.

The deal was moving toward fruition after the US lifted steel and aluminium tariffs on its North American neighbours just days ago, and lawmakers in all three countries began considering it. The new tariff threats are aimed at pressuring the Mexican government to do more to combat migrants travelling from Central America to the US border to seek asylum.

It’s an issue not really related to trade policy at all. But the tariff threats amount to a vivid signal, especially to allies, that there is no permanent trade peace with the Trump administration, and could have significant consequences for future trade negotiations.

If you are working in a trade ministry in Brussels, Tokyo or Ottawa, how much confidence would you have that any deal you strike with American negotiators will have staying power?

“I don’t see how our trading partners will continue to negotiate with us as if we have any credibility going forward,” said Emily Blanchard, a trade economist at Dartmouth’s Tuck School of Business. “They’re going to have a much harder time selling any costly domestic reform or sacrifice that is a concession to the US, because the US is acting like an erratic bully.”

The escalating trade war between the US and China had put Mexico in a promising position, as a destination for businesses making decisions about where to locate their supply chains and wary of tensions with China. Mexico has higher labour costs than China, perhaps, but it has an appealing geographical proximity to the US and the favourable trade relations that seemed to be codified by the USMCA deal announced at the White House last fall.

Even if the new tariff is cancelled before it is scheduled to begin, the action sends a signal that any cross-border supply chain — for decades a crucial strategy for large multinational firms and quite a few smaller ones — is inherently risky. “Mexico and Canada looked like a safe harbour because you just signed USMCA,” said Philip Levy, a senior fellow on the global economy at the Chicago Council on Global Affairs. “This action is saying, no, there really isn’t a safe harbour.”

The Trump administration’s trade strategy had seemed to be coming into focus. There was the USMCA deal, a relatively calm period of relations with Japan and Europe, and increased pressure on China. It all looked like a fairly coherent strategy of reaching trade peace with allies before starting a concerted assault on a range of problematic Chinese practices.

The renewed trade tension with Mexico, driven by issues unrelated to trade, could undermine that strategy.

Sometimes when you make a deal, it is a one-time transaction. If you are selling a car to a stranger on the internet, you may try to strike as aggressive a deal as possible. And if you’re unethical, you might even hide some problems with the car or try to change the terms after shaking the buyer’s hand.

But when selling a car to your next-door neighbour, you’ll probably be a lot more upfront. You will be seeing each other a lot, and are likely to have other issues you’ll need to resolve down the road. You need a sense of mutual trust, and selling the neighbour a lemon or reneging on an agreed deal is no way to establish it.

When two countries that share a long border are negotiating a trade deal, it is very much part of a repeating game. Mutual trust matters, because there will be an endless series of disputes that need resolving and much to gain from having a good relationship.

That kind of trust may have just taken a hit that will last, even after the details of the new Mexican tariff are long forgotten.

“A very straightforward interpretation is that trade deals with the US buy you nothing,” Levy said. “You may be asked to jump through hoops and do things that are painful, but in the end you have no guarantees that the president won’t stick on tariffs when something irritates him.”

It is true that Mexico — and other major trading partners — need the huge American market. And Trump’s constant threat of tariffs may succeed at getting victories on some discrete issues.

But if you sell the family next door a lemon, don’t be surprised if nobody in the neighbourhood wants to do business with you again.