Border Tax: Mexico Sanctions of $29 Bln?

Uncertainty around Donald Trump’s NAFTA and Mexico policies continue.

BY JOACHIM BAMRUD

If the United States imposes a border tax, Mexico could retaliate by imposing $29 billion of sanctions on US exports – sanctions fully authorized under World Trade Organization rules, according to a new report from the Peterson Institute for International Economics.

A border tax would also violate the North American Free Trade Agreement (NAFTA), which went into force in 1994 and linked the economies of the United States, Mexico and Canada.  

US President Donald Trump has repeatedly attacked NAFTA and plans to renegotiate the treaty.  And in January, The White House suggested that a 20 percent border tax on imports from Mexico would help finance the US-Mexico wall that Trump plans to build. 

Meanwhile, the Trump Administration is preparing to ignore any rulings by the World Trade Organization that it sees as an affront to U.S. sovereignty, the Financial Times reported at the start of the month.

“If the US withdraws from or reneges on its treaty obligations, one of the results could be a new set of investor/state or state/state disputes submitted to international arbitration or to litigation in national or international courts,” warns Paul Reichler, Chair of the International Litigation and Arbitration Department at Foley Hoag. (See also Latin America: The Arbitration Outlook).

Mexican Foreign Minister Luis Videgaray said earlier this month that Mexico hopes formal NAFTA talks will begin at mid-year and wrap up by December, projecting a more ambitious timetable than the one suggested by U.S. Commerce Secretary Wilbur Ross, Bloomberg reports.

Ross had said in an interview with Bloomberg TV that the trade talks will probably begin in the latter part of 2017 and that he hopes they won’t last much longer than a year. Such a scenario would directly impact the presidential elections in Mexico in July 2018.

“After a rocky start earlier this year—which climaxed with the Mexican president canceling his January 31 trip to Washington DC—the NAFTA negotiations seem to be back on track,” says Antonio Garza, US ambassador to Mexico between 2002 and 2009 during the administration of President George W. Bush. “After numerous backroom meetings, the process is slowly and steadily chugging through the preliminary discussions, and formal negotiations could begin as early as May.”

Regardless of the start date, however, the negotiations are likely to be much tougher than officials may be suggesting publicly, Garza points out.

“Negotiations on minor, non-sensitive issues can be time intensive and complicated,” he says. “And when the negotiations span three deeply interconnected economies and ideologically different governments, we are facing an extraordinarily enormous endeavor. Not to mention that if the changes are significant enough to demand comprehensive congressional approval, then the politics of pushing through an updated free-trade deal in today's anti-trade environment might prove anywhere from fairly tricky to utterly impossible.”

Further, there is always the chance that the Trump administration makes an unexpected move or statement during the negotiations that could knock them off track, Garza adds.

Case in point: While a high-level Mexican delegation was visiting the White House in January -- the first foreign representatives to come since Trump took office -- for meetings with top officials, including Chief of Staff Reince Priebus and adviser Jared Kushner – Trump sent out a Tweet again requesting that Mexico pay for his plans to build a wall between the United States and its southern neighbor, CNN reported.

“If Mexico is unwilling to pay for the badly needed wall, then it would be better to cancel the upcoming meeting,” Trump wrote.

As a result, Mexican President Enrique Peña Nieto cancelled the trip, while other officials cancelled planned meetings.

“So far, we've seen the Peña Nieto administration respond relatively patiently to rising tensions,” Garza says. “Yet if the political temperature spikes before the 2018 Mexican presidential elections, the Mexican government may find it politically necessary to adopt a stronger response.”

However, Pamela Starr -- an associate professor of international relations at the University of Southern California – says US tariffs on Mexican imports is becoming less likely.

“This seems less likely now than at any point since the start of Trump’s presidential campaign, but it is still possible to imagine scenarios which lead to this outcome,” she says.  “So while the potential is not great, neither can it be dismissed out of hand. “

Part of the problem at this point is the uncertainty around Trump’s policies, key people and even what he can get through Congress or not.  Last week, Trump’s plans to replace the Affordable Care Act were cancelled after he lacked enough votes despite the Republican majority. Issues like trade and border tax are also expected to divide Republicans.

Kevin Brady -- a Republican from Texas who heads the key House Ways and Means Committee in Congress - is a strong supporter of NAFTA.

“I think NAFTA has been extremely beneficial to the United States, in many ways, but there’s no question after 23 years it needs to be updated, to say the least,” he told Politico this week.

Meanwhile, Trump’s cabinet also includes former Texas governor Rick Perry, another strong NAFTA supporter, who now serves as Energy Secretary.

“Trump’s team of economic advisors have all made statements that point to an understanding of the significant consequences for the US economy, including for many districts where candidate Trump emerged victorious, of losing NAFTA’s trade and investment protections,” Starr says.  “This includes Commerce Secretary Wilber Ross who the President has suggested could lead up the NAFTA renegotiations, Trump’s yet to be confirmed US Trade Representative, Robert Lighthizer, who many expect to lead the actual negotiations, and Trump’s most protectionist economic adviser Peter Navarro, director of the National Trade Council, who has recently spoken of the need to deepen North American competitiveness.   This team is also beginning to recognize that Mexico is serious when it says it will walk away from any NAFTA renegotiation that veers away from a win-win outcome or if the United States imposes any new taxes on Mexican exports to the United States.”

Videgaray has repeatedly said that the country is prepared for the end of NAFTA if it can't reach a deal with the U.S. and Canada that benefits all three nations. "If what is on the table is something that is not good for Mexico, Mexico will step away from NAFTA" and rely on the rules of the World Trade Organization, he told Bloomberg last week.

Meanwhile, it remains unclear whether Ross or Lighthizer will lead the US negotiation effort and what the internal administration balance of power will be between the more traditional economic voices and the more protectionist ones, Starr says. 

“The Trump team has yet to clearly state what specific objectives it would like to obtain from a renegotiation of NAFTA,” she says.  “And the President himself can be unpredictable and impatient raising questions about how he might react to the delays and compromises that commonly characterize trade negotiations.”

While the US seems unlikely to make demands of Mexico that force it to walk away from the negotiations, it remains a potentiality that cannot yet be dismissed completely, Starr warns.  “And its enormous impact means that all involved actors must work mightily to avoid this scenario as they develop contingency plans to adapt to this very fat tail,” she says.

ANTI-AMERICANISM GROWS

Trump’s anti-Mexican comments during the US presidential campaign – which included calling Mexican immigrants rapists and criminals, pledging to build a wall between the United States and Mexico and frequently attacking NAFTA as unfairly benefiting Mexico at US expense – have led to a surge in anti-Americanism south of the border.

“Anti-Mexican rhetoric and anti-Mexico actions have generated a level of tension between the White House and Los Pinos not seen since the mid-1980s and threaten to reverse thirty years of deepening collaboration and partnership,” Starr says.  “In the process, the Trump Administration is damaging Mexican trust in the United States and reviving concerns that its very powerful neighbor will once again be the greatest threat to Mexican national interests, even as it continues to be the greatest opportunity.  And it has produced a New Mexican Nationalism which, while lacking the anti-American sentiments of the past, is deeply anti-Trump Administration and profoundly felt.”

In the midst of this tension, however, close collaboration, cooperation, and even trust continues to characterize the relationship among the national bureaucracies which manage the day-to-day economic, security, and human relationship.

Garza agrees.

“On the surface, much of the bilateral relationship continues apace,” he says. “Commerce and people continue to cross the border, tourists continue to book tickets to Cancún and New York, law enforcement agencies are still working together, and government officials continue to hold press conferences to highlight the importance of their bilateral and trilateral relationships. Yet, beneath the facade of normality, it's quite clear that something has fundamentally shifted. It's now commonplace to hear of Mexicans looking to vacation or study beyond the United States, citizens bristling at insults against their country, and Mexican officials struggling to come up with new strategies to approach an American administration that looks dramatically different from just a few months ago.”

Even Mexican public figures who have traditionally been staunchly pro-North America are now writing about abandoning NAFTA and looking elsewhere for political and economic partnerships, Garza points out.

“Yet, the significance or extent of today's changes will only become apparent over time,” he argues.

In the short term, there are too many constraining factors for immediate ruptures in the bilateral relationship. Barriers such as financial attractiveness, long-term contracts, or existing infrastructure will continue to influence business operations, family and community ties will pull citizens back and forth and across the border, and friendships and working relationships between government officials will continue to link the countries together, Garza points out.

“However, as the months go by, as officials switch posts, as investment dollars are earmarked for new projects, and as vacation and education plans are mapped out months and years in advance, we will begin to get a better sense of just how many bilateral threads this administration may be unwinding,” he says.

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