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Donald Trump is threatening the USMCA pact he initiated and signed, U.S. consumers, U.S. automakers and Mexican jobs, experts warn. Here Ford's Cuautitlán plant in Mexico. (Photo: Ford)
Wednesday, April 24, 2019

Mexico: Trump Car Tariffs Hurts U.S.

A 25% U.S. tariff on cars from Mexico would hurt consumers, auto sector.

Inter-American Dialogue

U.S. President Donald Trump recently threatened to impose 25-percent tariffs on Mexican cars, seeking to pressure the Mexican government to step up efforts to stem the flow of undocumented immigrants into the United States. How likely is it that the Trump administration will impose new tariffs on Mexico’s automobiles? What would be the potential consequences of such levies on the North American economy? What implications do Trump’s threats have for the United States-Mexico-Canada Agreement, or USMCA, and its ratification in the three countries?

Andrés Rozental, member of the Advisor board, president of Rozental & Asociados in Mexico City and senior policy advisor at Chatham House: Most of President Trump’s threats against Mexico have so far come to naught. No wall at the border; no withdrawal from NAFTA to press Congress to approve USMCA; no mass deportations; and no tariffs on automobiles. This last threat is an empty one if the U.S. government respects the signed side letter agreed to during the USMCA negotiations that exempts Canada and Mexico from any Section 232 (national security) actions against cars, up to a volume which is less today than what each country historically exports to its neighbor. Of course, Trump’s disdain for international treaties and other agreements could eventually result in him ignoring the pact already in force between Mexico and the United States and lead him to impose a punitive 25-percent tariff anyway. Any such action would: first, punish U.S. consumers, who would see the price of their cars go up; second, punish the American auto sector that would have to pay the tariff on imports from Mexico; and, third, harm a Mexican industry that accounts for millions of jobs that keep Mexicans at home. A resulting spike in suddenly unemployed workers could easily lead to a recession in the Mexican economy and a renewed flow of undocumented migrants to the United States. The main pressure on Trump not to go ahead with this particular threat comes from the U.S. automotive industry itself, which is lobbying hard to prevent a Section 232 action against Mexico and Canada, but any such decision would also immediately jeopardize Mexican and Canadian ratification of the USMCA.

Gary Hufbauer, nonresident senior fellow at the Peterson Institute for International Economics: Trump’s threat to impose a 25-percent tariff on auto imports from Mexico serves just one purpose: a splashy headline for the president. He needs such headlines almost daily. Their flavor is that foreigners are abusing Uncle Sam and Trump is America’s last defense against plunder. These claims appeal to Trump’s political base—so the president thinks. The threat is unnecessary to persuade President López Obrador to stem the flow of asylum seekers across Mexico’s southern border. The migrants burden Mexico. Stemming their flow is a task for Mexican border police, not trade threats. As for drugs, Mexican presidents have long cooperated with the United States to interdict cocaine and heroin. Auto tariffs would halt ratification of the USMCA both in Mexico and the United States. They would sharply raise new car prices paid by American households and render U.S. auto firms uncompetitive in foreign markets since critical parts are imported from Mexico. These shocks would not help Trump’s re-election campaign. A splashy headline, yes; a meaningful policy, no.

Monica de Bolle, director of the Latin American Studies program at the Johns Hopkins University School of Advanced International Studies: Under different circumstances and a different U.S. administration, the likelihood of tariffs being imposed on automobiles from Mexico would be low to nonexistent, given the substantial adverse effects that they would have on the three NAFTA countries. Automobiles from Mexico are not ‘Mexican,’ but rather contain parts and components imported from Canada and the United States, implying that tariffs would have a cascading effect on production costs and consumer prices everywhere in the North American region that could be very damaging. By raising production costs and consumer prices, these levies would hurt jobs across the region and would serve to make North America-produced cars more expensive compared to those produced in other parts of the world, creating problems for competitiveness that NAFTA itself sought and successfully overcame. The threats also have grave implications for the ratification of USMCA. Currently, the negotiated deal includes side agreements that preclude the imposition of tariffs on automobiles. Trump’s threats therefore could reopen a contentious discussion over the treatment of the automobile industry that would endanger the approval of USMCA in all three countries.

Pascale Siegel, managing director at Ankura: Tariffs of 25 percent on auto and auto parts would hurt U.S. importers first, since they pay the extra duties, and then reverberate throughout the economy. The Auto Alliance recently testified to Congress that tariffs would result in higher prices, declining production, layoffs and reduced competitiveness globally. The Mexican government thinks it insulated itself from such a mercurial move when it negotiated a side letter to the USMCA that exempts a large quota of imports from any 232 measure. The side letter is already in force, which explains the Mexican government’s muted reaction. President López Obrador did not comment on the announcement in his daily press conference. The undersecretary for North America, Jesús Seade, said officials were not concerned. Mexican Ambassador to the United States Martha Bárcena said that while Mexico was working to bring order to its border, migration will never be stopped. If the Trump administration reneges on its diplomatic and legal engagement, it will likely amount to a serious breach of trust for Mexico. Bilateral relations will likely sour as a result. Mexico could respond with any combination of the following measures: delay or refuse to ratify the USMCA; challenge the duties under the NAFTA dispute resolution mechanism; challenge the 232 measure at the WTO; and/or impose retaliatory tariffs, most likely on agricultural products. Meanwhile, a year of uncertainty as to whether tariffs will materialize or not and in what form could dampen enthusiasm for investing in the border region, further hurting the very communities the president intends to help.

Celeste Drake, trade and globalization policy specialist at the AFL-CIO in Washington: The administration should neither reduce much-needed aid for Central America nor impose auto tariffs to punish Mexico for migration flows. Either move would be a blunder, undermining both trade and immigration policies. This is a critical time for North American trade relations. To improve trade relations that benefit working people in all three countries, the new NAFTA requires several important fixes, including the addition of effective tools to monitor and enforce labor and environmental rules and the elimination of rules that threaten affordable prescription drugs and the ability to create new public interest regulations. Efforts to fix the new agreement would be impaired by the arbitrary application of new tariff barriers. The application of tariffs should be thoughtful and responsible, not stunts aimed to increase anti-immigrant hysteria. The administration should address the root causes of forced migration and advance policies that uplift working people on all sides of the border. Missing from the discussion has been the impact of corporate-led trade rules, as well as the failure of the United States to adequately invest in programs to build democracy, rule of law and robust, inclusive economies in Central America. Instead of treating families seeking safety and security as enemies, the United States should: welcome refugees and asylum seekers and stop sending families into harm’s way; end child and family detention; enact trade deals that raise and enforce labor standards; and invest in decent work and worker rights in Central America to reduce the ‘push factors’ that breed desperation and displace working families.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor


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