Friday, May 31, 2019

Trump Relaunches Trade War With Mexico

There is a saying that “To a man with a hammer, everything looks like a nail.” When it comes to tariffs, Donald Trump is a man with a hammer. Tariffs seem to be his tool of choice to (attempt to) fix any problem.

The most recent example is illegal immigration. Yesterday, President Trump threatened to impose tariffs on Mexican imports on an escalating basis. The president said that tariffs would begin on June 10 at a five percent and rise periodically to 25 percent in October unless Mexico stops “ illegal migrants” from entering the US.

Let’s think about the profound illogic of this plan for a moment. First, Mexico has shown itself to be unable to stop the migrant caravans from crossing its own southern border. We all remember the pictures of thousands of migrants streaming across bridges and overwhelming Mexican border security forces.

On the other hand, the migrant caravans were stopped cold when they reached the US border. After marching across Central American and Mexico for weeks, the majority of migrants stopped in Tijuana and waited for their turn to ask for asylum in accordance with US law.

The inability of the Mexican government to stop the caravans and to track down and detain smaller groups of migrants is a problem, but it does not seem that the problem is due to lack of trying from the Mexican government. In fact, the larger, richer, better-equipped US government has the same problem when confronted with migrants traveling in small groups.

Second, how are tariffs on Mexican imports, supposed to resolve the issue? As we have established before, “tariff” is a fancy word for a tax on trade. Like any tax, such as a sales tax or tax on cigarettes or soft drinks or even increases to the minimum wage, the cost of the tariff tax is passed along to the end user, which in this case is the American consumer. When we acknowledge the reality that tariffs are taxes, Donald Trump quickly becomes one of the biggest tax increasers in American history with much of the burden falling on the American middle and lower-income classes.

Of course, Trump’s hope is that the increased cost of Mexican goods will make Americans stop buying from Mexican companies. Tariffs are intended to raise prices on American consumers, hurting them to eventually hurt foreign companies. But again, it isn’t clear that Mexico could be doing a lot to stop illegal immigration that it isn’t doing already. If there are additional steps that Mexico could take, hurting the country’s economy may not be the best way to encourage them to spend more money on border security. Damaging the Mexican economy would likely result in more illegal immigrants, not fewer. 

There is also the question of how the new tariffs will impact the president’s new US-Mexico-Canada trade agreement, which has yet to be ratified. The replacement deal for NAFTA may be endangered by the president’s capricious use of tariffs to try to leverage Mexican cooperation. The real danger for the US economy is that the free trade deal will implode, resulting in higher taxes and more regulation on trade with Mexico, which is an important part of the supply chain for many American companies.

President Trump’s tweets suggest that he favors tariffs for their own sake. The protectionist president has called himself “a Tariff Man” and has repeatedly shown a misunderstanding of the economics of tariffs and international trade. He fails to accept the fact that the cost of his tariffs is being borne by American taxpayers and not multinational corporations.

There are signs that Congress, which is now reaping the bitter harvest of tariff laws that delegated too much congressional authority to the executive branch, is starting to resist the president’s tax increases. Justin Amash (R-Mich.) in the House and Chuck Grassley (R-Iowa) in the Senate have been particularly outspoken against the president’s trade policies.

“Trade policy and border security are separate issues. This is a misuse of presidential tariff authority and counter to congressional intent,” Grassley said in a statement, adding that the tariffs “would seriously jeopardize passage of USMCA.” Grassley has suggested in the past that ratification of the USMCA be tied to the removal of tariffs, but, at this point, it is not clear that President Trump values his free trade deal more than his tariffs.

“I support nearly every one of President Trump’s immigration policies, but this is not one of them,” Grassley added.

Meanwhile, markets are roiled as a front on the trade war that was deemed quiet has suddenly flared up again. The economy has been one of Donald Trump’s top strengths and his supporters hold out hope that it will be the key to his re-election, but most of the current weakness and instability in the economy can be traced back to the president’s trade war. It is entirely possible that Trump’s insistence on interfering in international trade will weaken the economy just in time for the election.

Originally published on The Resurgent

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