What effect will Mexico’s retaliatory tariffs have on the United States economy?

By Alfonso Llanes on 07/07/2018 16:43

Trump’s decision to impose tariffs on both Mexican and Canadian metal imports advanced the level of trade tensions that were already present in the North American Free Trade Agreement (NAFTA).

President Enrique Peña Nieto and Canadian Prime Minister Justin Trudeau rebuked the United States’ decision to move towards protectionism which just escalates the issues across the borders. Trump, has floated the idea that the U.S. would like to get separate deals with its two neighbors because he feels he can bully his weight better with the parties in isolation

When trump introduced the new tariffs very little progress had been accomplished on NAFTA since Mexico’s Guajardo and Canada’s chief negotiator, Foreign Minister Chrystia Freeland, have charged that breakup of the treaty will isolate Mexico and Canada and thus, will have to deal individually with the weight of the US economy leaning on them for greater concessions.

Former United States commerce secretary Carlos Gutierrez described the tariffs as being part of a “gun-to-the-head negotiating style” that actually made it more difficult to agree to a deal “without committing suicide domestically.”

It has been reported that more than 50 dairy groups wrote to Trump and urged him to drop the tariffs, because it would only benefit producers in the European Union, which reached a new trade agreement with Mexico in April. Besides imposing its own retaliatory tariffs, Mexico will challenge the United States’ at the World Trade Organization on the grounds that Trump’s tariffs violate international trade rules.

Canada has responded to the US tariffs on steel and aluminum by imposing billions worth of counterweighting tariffs. In the meantime, Mexico placed duties on food and steel and the EU vowed its own retaliatory tariffs for Trump’s decision to slap tariffs on steel and aluminum from the European Union which has sharply escalated global trade and amplified a rift with America’s closest allies. This will result without a doubt in condemnation and retaliation as well as multilateral challenges at the World Trade Organization.

Canadian leaders reacted particularly angrily to the tariffs, that Trump had justified on the grounds of national security which is offensive to Canadian officials who have called it absurd, illogical and illegal. France’s Macron said in a speech after the US announcement. “Economic nationalism leads to war. This decision is not only unlawful but it is a mistake in many respects.”

International Monetary Fund chief Christine Lagarde meanwhile warned the G7 officials of an erosion of trust saying that the action will “distort and damage and disrupt supply chains which have been established now for decades”.

“This is protectionism, pure and simple,” said Jean-Claude Juncker, president of the EU Commission, which represents the 28-member states in the union. He added the US “now leaves us with no choice” but to impose duties on American imports, but without specifying the exact amount or timing of the retaliation

Many U.S. manufacturers have well-developed supply chains within NAFTA while allies need to gang up against the US illegal actions the fight might be long and sustained until something brakes. Trump’s invocation of national security to justify tariffs just opened a Pandora’s Box because similar claims can be made by other nations resulting in a never ending loop with an escalating threat to no end in sight.

No one is really surprised when Trump in a day an hour later or in the same sentence contradicts himself. When it comes to policy, he doesn’t know anything and he doesn’t care to know. Sooner or later this madness needs to stop before the big guns start firing.