What you need to know
Might Mexico choose to abandon trade ties with the U.S. in favor of stronger ties with China?
As U.S. President Donald Trump begins campaigning for a second term, he appears to fully embrace his status as a "tariff man." On May 30, President Trump announced plans to impose new tariffs on all imports from Mexico, "until the illegal immigration problem is remedied." The tariffs would begin at 5 percent on June 10 and gradually rise to 25 percent by October. Instead of immediately confronting Trump, Mexico's President Andrés Manuel López Obrador, known as AMLO, publicly maintained the same strategy he has followed in his first six months in power: he spoke about the need to avoid confrontation with the U.S.,"We won't discard them but prefer to seek a convenient solution for both countries," AMLO told reporters at his daily press conference on May 31, "we're going to wait for the situation to evolve."
On July 7, Trump suspended imposing tariffs after reaching an agreement with Mexico to "stem the tide of migration" through the country. López Obrador announced the avoidance of tariffs and expressed appreciation to all Mexicans for their support. He celebrated in Tijuana next day. However, according to Anne O. Krueger, former first deputy managing director of the International Monetary Fund and senior research professor at the School of Advanced International Studies, Johns Hopkins University, "President Donald Trump has done more than inject more absurdity into the news cycle."
While AMLO's response to the proposed tariffs was shrewd and measured he runs the risk of letting Trump paint Mexico as a scapegoat for American governance troubles. This may play well initially with Trump's supporters, but it could backfire in the long term. Tariffs are taxes on consumers and also hurt domestic firms that use foreign inputs. While populists in the US and elsewhere welcome various forms of protectionism, it will ultimately slow down the economy and hurt voters.
If the tariffs go into effect, Mexico would be very likely to respond by imposing retaliatory tariffs, which is especially bad news for American farmers, a key political demographic for Trump in the upcoming elections. Furthermore, the tariffs threaten vital and tightly intertwined manufacturing sectors in both countries. The supply chains run back and forth between US and Mexico, and about two-thirds of the trade between them are between factories owned by the same company, according to Deutsche Bank.
Poisoning the USMCA
Trump's new tariff threat to Mexico could also derail his efforts to secure approval of a renegotiated NAFTA — the deal that sets the terms of trade among the United States, Mexico and Canada. The main point of the deal, from Mexico's perspective, is to guarantee reliable access to the American market. In exchange, Mexico has agreed to make concessions, including improvements in labor laws. But Trump is giving Mexico reason to doubt whether he will keep his side of the bargain.
Mexico sent US$346.5 billion worth of goods to the U.S. last year, a figure that underscores the importance of the bilateral trade relationship. If the proposed tariffs cause a downturn in the Mexican economy, more citizens are likely to try to cross the border to find work in the United States, undermining Trump's plan.
There is a danger that Mexico may eventually find that tying its economic fortunes to the U.S.-Mexico-Canada Agreement (USMCA) is not in its national interests. In fact, Mexicans are aware that the commercial relation with the United States, which buys 80 percent of Mexico's exports, is overly critical to the Mexican economy. Worse, the economic impacts of Trump's trade dispute with China have been expanding, and the countries of Latin America are paying an early price, even as bystanders. The Mexican case particularly demonstrates how prolonged trade-related threats, even when unrealized, affect capital flows, exchange rates, inflation, interest rates, and, ultimately, economic activity.
Unlike the USMCA, which was at least premised on the goal of addressing trade issues, Trump's tariff pronunciamento was a bald-faced attempt to force the Mexican government to solve America's own immigration problem. While uncertainty increases between the US and Mexico, the Sino-Mexican partnership will almost certainly deepen for three reasons. First, arguably, diversifying trade can reduce Mexican economic dependence on the United States and their exposure to a potential global trade war. China can help Mexico to achieve this. Second, AMLO can take advantage of China's "patient capital," an important form of state-led capitalism that is characterized by a longer-term horizon. For instance, China can help Mexico to build the Mayan Train (Tren Maya). Third, AMLO can help China transform the traditional extractive model of investment into a more productive one, such as in green energy. Consequently, through different projects, Mexico and China can achieve a win-win "comprehensive strategic partnership."
According to Luis Rubio, president of the Mexican Council on Foreign Relations (COMEXI), "it is not impossible that, sooner or later, we will end concluding that dealing with the United States, even with Trump, is child's play in comparison with the Oriental dragon." Former Mexican foreign secretary Jorge Castañeda once characterized Mexico's growing interest in China as an "expression of machismo" directed against the United States. It is time for AMLO to show his machismo.
Editor: Cat Thomas(@TheNewsLens)