If you have been following Donald Trump, the outspoken leader of the United States, you would know that he has turned on the country’s neighbours to the south and taken a stoic stance against them since his election in November 2016. He effectively labelled them a national security threat, asserting his position with strict policies and daring moves intended to manifest his stance, creating an adversarial system with Mexico in the time he has been in power. Unsurprisingly, he has recently advanced his position by levying 25 percent tariffs on steel and 10 percent on aluminium imports from Mexico, as well as Canada and European countries.
Before further discussing the implications of these moves, it is important to just run through the essentials of trade sanction jargon. So firstly, what are tariffs? These are taxes imposed on products made abroad. In theory, taxing items coming into the country (imports) makes people less likely to buy them as they become more expensive. They’re likely to buy cheaper local products instead, boosting your country’s economy.
Taking a stance
Naturally, these countries refused to take it lying down and are targeting quintessentially American products. Canada announced retaliatory tariffs on beer kegs and pizza from the United States. And the European Union has threatened to tax imports of blue jeans, bourbon, and Harley-Davidson motorcycles. However, Mexico’s answer has been a sucker punch to their partners bordering them to the north; a tax of 10 percent became effective earlier this month, and by early next month, it will rise to 20 percent. The penalty will remain in effect until Trump undoes his steel and aluminium tariffs, the Mexican government said.
Of the $400 billion Mexico exports each year, 8 out of 10 cents head north. US-Mexico trade is worth about $600bn annually and about 16% of US goods go to its southern neighbour. This is a nation that is one of the most commercially open the world over, with trade as the throbbing, pumping engine of its economy. The reliance on the trade with the U.S can therefore not be understated.
So, among Trump’s ever-growing number of combative trade fronts, Mexico might therefore stand out as the most likely to fold. But Mexico is undoubtedly prepared for this fight. As Economy Minister Ildefonso Guajardo declared after the tariffs were announced, “We always said that we were going to be ready to react.” They wasted no time and immediately announced punitive measures. Certain types of steel made the list; so did lamps, cheese, pork, apples, grapes and cranberries. This selection wasn’t a haphazard one. Instead, it was designed to gain both economic justice and political leverage, targeting key congressional districts and Trump supporters.
The aforementioned measures could proceed to damage Republican support ahead of the mid-term elections this November. Case in point, in Iowa, the top pork-producing state in the US, with Mexico as its largest market, Republican Congressman Rod Blum is seen as vulnerable.
The move has also dismayed some domestic businesses, including pork producers, who now face a 20% tariff on exporting leg and shoulder to Mexico. Mexico is the largest market for US pork exporters. Certain cheeses and bourbon will be hit with 20% to 25% duties. For neighbouring Mexico, this will affect some $3 billion in exports.
Yet the size of the tariffs belies their true significance. The renewed trade dispute between US and Mexico comes amid fraught attempts to renegotiate the trillion-dollar North American Free Trade Agreement (NAFTA), which governs trade between the United States Canada and Mexico. The move effectively throws a spanner in the works in the deal. Moreover it is one which, economic adviser to Mr Trump, Larry Kudlow, some time ago revived a possibility that the president would attempt to replace NAFTA with bilateral deals with Canada and Mexico – a move both nations oppose.
As of now, it is difficult to tell where this economic back and forth will lead. Despite its initial bravado, Mexico will undoubtedly suffer, particularly if the U.S. ups the ante with further tariffs or threats to NAFTA. The nation is also facing a political transition that could have its own economic repercussions. However unilateral support for the government’s stance has been given by the election’s key players and the nation’s business community, and its performance in this first round that there are no easy wins in trade wars. Additionally, this time it isn’t alone. Several U.S. manufacturers and well-developed supply chains are supporting Mexico. With Canada and the EU are joined in the fight, the U.S will think twice about belittling their underdog neighbours.
All of this bears great import if you are an investor interested in investing in international shares and overseas trading.