Leibowitz on Trade: Trump's New Tariffs on Mexico

The action provides a new and more critical role for tariffs in the conduct of foreign policy as well as international trade. Since the birth of the Republic, tariffs have been important tools in trade and economic policy by creating federal tax revenue and protecting selected domestic industries. Now we will see if they can prompt Mexico to do more to protect our southern border against illegal immigration and drugs. 

On Thursday, the president, invoking the International Emergency Economic Powers Act (“IEEPA” in Washington-speak), announced the new Mexico tariffs. Two weeks earlier, the president announced the end of Section 232 steel and aluminum tariffs on Canada and Mexico. And shortly before that, he announced 25 percent tariffs on $200 billion of goods imported from China and the possibility of 25 percent tariffs on an additional $300 billion of Chinese imports beginning as early as July. The possibility of new tariffs on automobile and auto parts imports, as well as uranium for nuclear power plants, remains on the table. The president has declared his affinity for tariffs and his actions reinforce that belief. 

The reason for the new tariffs on Mexico, the president announced, was the crisis on the southern border. The capture of migrants attempting to cross the southern border has skyrocketed in 2019. More than 100,000 migrants were detained in April alone, and the number is expected to increase in May. 

My first reaction to this was that the president’s legal authority to impose tariffs under IEEPA in response to the border crisis is highly questionable. The IEEPA statute authorizes the president to take specific actions with respect to an “unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States…”  The president must declare a national emergency with respect to the “unusual and extraordinary threat” and may take emergency action to address that threat. Raising tariffs is not among the actions enumerated in IEEPA. This may be significant. 

I expect lawsuits this week in anticipation of the tariff proclamation or, if not this week, soon after the proclamation is published. There are reports that the U.S. Chamber of Commerce is preparing a lawsuit. We will have to wait and see what the courts decide—but the president risks a stern rebuke from the courts, as well as from Congress. Indeed, the courts may enjoin collection of the new tariffs to prevent irreparable injury, although that is an unusual action for a court to take.

My second reaction is that the ability of the new tariffs to compel Mexico to increase its border activities has not been proven. The immigration crisis at our southern border stems from unrest in Central America, not Mexico. Migrants are arriving at the U.S.-Mexico border from Guatemala, Honduras and El Salvador. President Trump has urged Mexico to close its southern border to keep refugees from getting north. One wonders how tariffs can stop migration from Central America through Mexico. I suppose we will find out.

The president clearly believes that Mexico is not doing enough to stem the flow of migrants through Mexico to the U.S. border. The pressure of looming tariffs on U.S. imports from Mexico will, he believes, cause Mexico to change its behavior and cause them to stop illegal immigration from Central America. Senior Mexican officials are meeting this week in Washington to try to head off the tariffs; however, I do not expect they will guarantee to stop the flow of migrants through Mexico. The ability of Mexico to do that without brutality is limited; and the pride of Mexico has been wounded by the sudden action of the U.S. president. 

This morning, Chief of Staff to the President Mick Mulvaney predicted that the tariffs would go into effect on June 10, unless there was significant action by Mexico to stem the tide of immigration. However, he did not say what sort of action would prompt President Trump to rescind the threatened tariffs. 

One thing we do know is that the tariffs will harm American consumers and businesses. Tariffs are a tax on American importers. At 2018 levels of imports ($346 billion), 5 percent tariffs would directly cost American importers $6.9 billion on an annual basis. Imports of products from Mexico, such as automotive ($93 billion), machinery ($63 billion), medical devices ($15 billion), steel imports ($3 billion) are vital to many U.S. supply chains and difficult to change in the near term. These new tariffs are unlikely to be paid by Mexican exporters through lower export prices to American customers. Americans will pay. 

The consequences of changing supply chain dependence on Mexico, ironically, stand to make the border crisis worse by eliminating thousands of jobs in Mexico. But changing supply sources from Mexico would require some very difficult business decisions; those decisions are not likely to happen this week, or even this year. Thus, the tariff burden will fall on American importers and manufacturers in the short term.

The president denies this, as he has done in response to criticism of the tariffs on China. He and his aides claim that the nation’s economy has continued to prosper even with high tariffs. But he goes further—he claims that the tariffs have actually improved the economy. This is highly questionable, based on decades of empirical data. Tariffs help some but hurt many. 

The initial tariffs of 5 percent are not likely to cause immediate business closures or flight of supply chains from Mexico. The harm to U.S.-Mexican relations could, however, extend for years. And, as members of Congress from both parties have stated, it will make it very difficult for Congress to pass the U.S.-Mexico-Canada Agreement (USMCA). The Congress of Mexico will have an even harder time ratifying the new agreement after what has been widely seen as an affront to Mexico.

Lewis Leibowitz

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