Leibowitz on Trade: Mexico Tariffs—What Just Happened

For now, all imports from Mexico will be free of duty under the original NAFTA, which dates back to 1994. Friday night’s agreement will require Mexico to keep in Mexico Central American migrants seeking political asylum in the United States. Mexico has agreed to care for the migrants and give them work permits while they wait for an asylum hearing in the United States. There are nearly one million cases requesting asylum in the queue already. Last month, over 100,000 migrants were detained, so the number will go up.

What are the lessons we can learn from this most recent tariff episode? I thought of six significant takeaways from the threatened tariffs and the deal that removed that threat, at least for the time being:

1. President Trump likes tariffs—a lot. He not only likes them because they give him bargaining leverage, although they do give him that (see takeaway 2). He also likes them because he believes they are good for the United States. He is decidedly in the minority on the latter point, but his opinion does matter as long as he is president.
2. President Trump succeeded in getting the attention of the Mexican government by threatening tariffs. This is the leverage point. While the leverage is certainly limited, by the political circumstances and the questionable legal authority for his threatened action, it did result in emergency meetings with Mexico to reach an agreement to ease the border crisis, requiring Mexico to do more to keep migrants out of the United States.
3. Mexico apparently did not agree to any major policy changes that they previously declared unacceptable. For example, Mexico refused to agree to U.S. demands that it establish a “third country” standard for asylum-seekers. This change would require migrants leaving Central America to seek asylum in the first country on their journey that had acceptable conditions. In short, if Mexico has a reasonable regime (and most agree that it does), migrants would have to make their arguments for asylum to the Mexican government rather than the U.S. government. Under the agreement, Mexico will keep migrants, but will not require them to seek asylum in Mexico rather than the U.S.
4. The U.S. also made some commitments. For example, reports indicate that the U.S. agreed to resume substantial aid to Central American countries to address the economic conditions and lawlessness that are driving thousands of people out of those countries to seek a better life. That aid had been cut several months ago; in the intervening months, migration has increased substantially.
5. The credibility of the threatened tariffs was weakened by opposition at home. Some Republicans in the Senate were vocally opposed to the tariffs and threatened to block them if they went into effect. The president complained that congressional complaints weakened his negotiating position, and he was right about that. However, congressional Republicans believed that tariffs would not only hurt American businesses and consumers severely, but that they would kill any chance of congressional approval of the USMCA agreement.
6. Mexico and other countries will be on their guard against further threats of trade-related actions like tariffs to achieve non-economic objectives. While Mexicans are relieved that the tariffs this time were avoided, there may come a time when they will not give into threats like this. Global prosperity could hang in the balance.

According to announcements from U.S. and Mexican sources, the agreement will be finalized over the next 90 days. Therefore, the details will probably come out in small pieces over the next several weeks. Observers will certainly pay attention to the numbers of migrants from Central America and whether American and Mexican companies will change their plans regarding two-way trade. Once a threat like this has been made, businesses who crave certainty will remember how close they came to a major disaster.

The other institution to watch is the U.S. Congress. The president’s inability to secure funding to build a wall has led him to reach an agreement with Mexico that makes a wall less necessary (if Central American migration slows down). The message after Friday night is clear: the president views Mexico as more cooperative than the U.S. Congress.

Many Democrats believe the crisis at the border is the president’s fault. By threatening to close the border a few months ago, migrants may have felt that they needed to move now or they might lose their chance to escape their home countries.

In the trade arena, the Mexican tariff episode will certainly keep other countries from relying on the commitments of the United States to abide by trade agreements. That could make future agreements more difficult to reach, including with China. The China trade war continues, as do the controversies over steel and aluminum and their relationship (or lack thereof) to U.S. national security.

Lewis Leibowitz

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