Firmness in the Face of Trump's Schizophrenia

May seemed to be a month of great progress towards the approval of the new version of the North American Free Trade Agreement (NAFTA), the so-called United States-Mexico-Canada Agreement (USMCA).

On May 17, 2019, the United States agreed to remove the 25 and 10 percent tariffs applied respectively to steel and aluminum from Mexico and Canada for reasons of national security. On May 20, 2019, Mexico and Canada subsequently removed the retaliatory tariffs imposed on the United States for this measure.

Also this month, the U.S. authorities and relevant political and economic actors reacted favorably to the labor reform approved by Mexico on April 29th, in order to comply with the commitments provided for under the USMCA. Finally, May concluded with the three countries turning the USMCA over to their respective legislatures, beginning its ratification process.

In light of the progress achieved, Mexico was surprised on May 30th by another schizophrenic reaction of the U.S. president, threatening to impose from June 10, 2019, a 5 percent tariff on all of the products Mexico exports to the United States, and to continue increasing the tariff monthly until it reaches 25 percent on October 1, 2019. The president’s statement demands that Mexico take effective actions to alleviate the crisis of illegal immigration that afflicts the United States. The tariff will only be removed if Mexico substantially stops the illegal flow of foreigners, subject to the “sole discretion and judgment” of the government of the United States.

In order to determine the possible retaliation that Mexico could apply to the United States, SAI Law & Economics made a projection of the total Mexican exports to the United States, for the months between June and December 2019, based on historical ratios of monthly exports (between 2015 and 2018) relative to exports from the first quarter of this year. This estimate does not take into account the probable reductions that export volumes will suffer, as a result of the same tariffs.

As can be seen above, the cumulative damage that would be generated by the application of generalized tariffs to Mexican exports to the United States in 2019 is estimated at 37,500 million dollars. Mexico would have the right to apply retaliatory tariffs for that amount.

Said amount is far superior to the retaliation adopted by Mexico in the past, 3,600 million dollars in the case of steel and aluminum (June 2018-May 2019); and between 2,400 and 2,600 million dollars in the case of cross-border trucking services (2009-June 2011). The retaliation lists affected altogether 188 tariff subheadings, whose import value in 2018 amounted to 10,274 million dollars.

Based on this figure, it is estimated that imports in Mexico of products in those subheadings, between June and December 2019, would amount to 6,085 million dollars. This figure is estimated using the same process as the aforementioned estimation of Mexico exports to the United States.

Even if Mexico imposed 100 percent tariff rates on the total of imports from the United States on the list of products it has previously applied retaliatory tariffs, from June and until December 2019, the retaliation value would only reach 16.2 percent of the damage generated by the tariffs imposed by the United States.

Therefore, it would be necessary to identify which other products and other NAFTA commitments Mexico could suspend in order to be compensated (e.g. services, government procurement). In that exercise, Mexico must apply the same criteria it adopted in its past retaliation: not to affect Mexican production chains, as well as prices of the products of the basic food basket, and very importantly, that the measures are aimed at the companies, sectors, and actors that can exert the most pressure before the authorities of the United States.

It is time for the economic actors on both sides of the border to react strongly to a measure that is flagrantly in violation of NAFTA and the agreements signed under the World Trade Organization. Previously, Mexico’s intervention has been critical to stopping President Trump at different times from notifying Mexico and Canada of his intention to withdraw the United States from NAFTA. It has also been reported that this new measure will be challenged in the courts of the United States for not meeting the requirements provided for in the International Emergency Economic Powers Act.

In the face of serious disturbances in President Trump’s thinking and behavior, the immediate treatment on Mexico’s part must be firmness in the defense of the legal framework that has governed our relationship for the past 25 years, and that has contributed to greater competitiveness and growth of the region.

Beatriz Leycegui is a Partner at SAI Law & Economics and former Mexican Undersecretary for Foreign Trade.