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Trump’s 20% tariff may harm US more than Mexico

Americas / 01-02-17 / by
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The Trump administration is considering the implementation of a 20% import tax on products from Mexico to pay for a border wall, but such a measure is likely to do more harm than good for America.

Tension between the US and Mexico is rising after President Donald Trump signed an executive order to start building a wall between the two countries just days before President Enrique Peña Nieto was due to visit the White House.

To make matters worse, Trump then tweeted that if Mexico wasn’t willing to pay for the wall he had just ordered, the Mexican president’s state visit might as well be cancelled. Sure enough, Peña Nieto, under domestic pressure to stand up to the American leader, cancelled his visit.

Upon hearing the news, the White House mooted the possibility of imposing a 20% border tax to pay for said wall. This was broadly reported as a tax on Mexican imports only, but Kenneth Levinson, executive director of the Washington International Trade Association (WITA), explained during a webinar this week that this would be a much broader measure.

“The border tax was first portrayed in a lot of the media as a tax on Mexican imports, but the reality is it’s a broad-based tax that, if it moves to the congress, it’s on all imports from all around the world, and it’s not paid by the country that’s shipping the product, it’s paid by the importers and American consumers,” he said.

While the White House communications have been sparse on details, the initiative would have its most direct impact on the Mexico-US trade relationship. Because of the strong integration between Mexican and American supply chains (45 cents for every US$1 exported by Mexico to the US is comprised of US goods and/or services), manufacturers from both countries would suffer.

I believe the key words to describe the current business sentiment among Mexican exporters (as well as their counterparts in the US) are: uncertainty, confusion and distrust. Gerardo Gutierrez-Olvera, Banorte

Gerardo Gutierrez-Olvera, managing director, trade finance at Mexican bank Banorte, tells GTR: “This newly proposed import tariff for Mexican goods and services would ultimately hurt the competitiveness of US manufacturers because of its effect on Nafta (the North American Free Trade Agreement) cross-border supply chains and at the same time would force American consumers to pay more at the checkout counters for Mexican goods instead of saving that  money and spending it on goods and services made in America.

“Since Mexico is the second-largest supplier of agricultural imports for the US, consider the impact on American consumers of a 20% hike in the cost of foods such as avocadoes, berries, lemons, mangoes and other products that simply cannot be grown in the US.”

The tax would also go against the principles of Nafta, which is due to be renegotiated between the US, Mexico and Canada, though last week’s diplomatic row doesn’t bode well for the future of discussions.

While there is some recognition among all Nafta members that the agreement could use an update, the belligerent attitude exhibited by Trump risks turning the renegotiation into a trade war.

“I believe the key words to describe the current business sentiment among Mexican exporters (as well as their counterparts in the US) are: uncertainty, confusion and distrust. Unfortunately, if the US goes ahead with this kind of unilateral protectionist actions, it would entitle and force Mexico to respond by retaliating with compensatory blocking measures that would make US goods and services more expensive and maybe even unaffordable for Mexican buyers.  It sounds like a lose-lose situation for everybody,” adds Gutierrez-Olvera.

Because the sectors targeted by Trump’s policies (mainly automotive and manufacturing) usually trade on an open-account basis, he believes that trade finance would not be heavily affected by the measures. Banorte is monitoring the situation and its trade finance portfolio closely, but hasn’t taken any reactive steps yet.

Protectionist measures would also affect foreign direct investment (FDI) flows between the two countries: US FDI in Mexico is over US$110bn, and Mexico’s FDI in the US is US$20bn. Paradoxically, curving FDI could lead to the exact opposite effect from what Trump is hoping for: Mexican billionaire entrepreneur Carlos Slim pointed out last week that the “best wall” against Mexican immigration to the US is investment into economic activity and job opportunities in Mexico.

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