Anne O Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the School of Advanced International Studies, Johns Hopkins University, and Senior Fellow at the Center for International Development, Stanford University
Threat of new tariffs will lead small countries to align themselves with one large country or another
WASHINGTON, DC – Late last month, US President Donald Trump threatened to impose tariffs on imports from Mexico in ten days if it did not halt the flow of migrants from Central America. The tariffs would start at five percent and then increase by five percentage points monthly until reaching 25 percent in October. The announcement came as a shock, especially given that the United States and Mexico (plus Canada) had reached an agreement on a revised North American Free Trade Agreement just months earlier, at Trump’s insistence. Ratification of the new trade deal, the US-Mexico-Canada Agreement (USMCA), is now in jeopardy.
The Trump administration’s flailing efforts to reduce the flow of migrants arriving at the US-Mexico border have long been a source of public spectacle. In this instance, after a few days of deep uncertainty, Mexico and the US announced that they had reached an agreement whereby Mexico would take steps to stem the flow of migrants, and the US would refrain from imposing tariffs. Precisely what actions Mexico would take went largely unspecified, or had already been promised months earlier.
Nonetheless, Trump, resembling British Prime Minister Neville Chamberlain after his return from Munich in 1938, waved a piece of paper in front of reporters, claiming that it held proof of Mexico’s commitment to accede to US wishes. Trump made it clear that if illegal immigration does not decrease at the rate he wants, he will carry out his threats.
Though tariffs were avoided, Trump’s brinkmanship has come at a high cost. Most important, the threat (which seemed credible) constitutes a major breach of global trade rules. The likely response from other countries is almost certain to weaken the system, reduce trade, and slow global growth further.
As for the threatened tariffs themselves, they would have severely disrupted the value chains of the North American auto industry and many other sectors. They also would have been self-defeating. Given that 80 percent of Mexico’s total exports go to the US, the effects on Mexico would have been economically crippling and politically destabilizing, leaving the country even less equipped to do anything about illegal immigration.
Unlike the USMCA, which was at least premised on the goal of addressing trade issues, Trump’s tariff pronunciamento was a bald-faced attempt to force the Mexican government to solve America’s own immigration problem. In other words, a trade weapon was being deployed neither to address a trade issue nor as part of a legitimate sanctions regime, such as that imposed on Russia following its illegal annexation of Crimea in 2014. On the rare occasions when trade sanctions have been used for non-trade reasons, they were a measure of last resort, as in the case of apartheid South Africa, where they succeeded because they had multilateral support.
Damage to trading system
Once trade measures are used indiscriminately to advance non-trade objectives, the damage to the entire trading system is done—and it can be enormous. The Trump administration’s willingness to weaponize tariffs for any purpose invites all other countries to do the same, and casts a cloud of uncertainty over international commerce. Protectionist forces in other countries have no reason not to use Trump’s threats to support their own demands in non-trade disputes.
Moreover, the violation of World Trade Organization rules by the US leaves other countries with little reason to negotiate preferential trading arrangements or further tariff reductions, given that their efforts could later be squandered in a forced renegotiation. At this point, all governments must assume that US tariffs might be used against them. Because the US is large enough to devastate many smaller economies, any responsible government must reduce its exposure.
At the same time, other large countries that are in a position to deploy punitive trade measures against those they don’t like will now feel free to do so. The threat of new tariffs will inevitably lead small countries to align themselves with one large country or another, for fear of being caught in the middle. The risk that the entire global economy will break up into discrete trading blocs cannot be discounted. Were that to happen, the resulting costs to all countries would be enormous.
As if this weren’t bad enough, Trump’s blundering threats have clearly alienated a large majority of Mexicans. After years of hostility, Mexico and the US had finally started to grow closer over the past three decades, much to the benefit of both countries. Mexico is of great strategic importance to the US, as one of its largest trading partners and one of only two countries with which it shares a border. Now, according to some reports, 84 percent of Mexicans believe that they should unite behind Mexican President Andrés Manuel López Obrador in standing against the US.
Looking ahead, it is highly unlikely that the flow of migrants traveling to the US will decline by enough to satisfy the self-proclaimed “tariff man.” The US has been taking measures unsuccessfully to reduce undocumented migration since the 1950s. And the European Union has struggled to stop the flow of migrants and refugees arriving from the Middle East and Africa.
If the US and the EU cannot do it, what reason is there to believe that Mexico can? Even if Mexico did manage to pull off a miracle, the damage to the global economy, the trading system, and to America’s standing in the world is done; and it is substantial. Trump has opened a Pandora’s box, and we will all have to live with the forces he has unleashed on the world.
Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the School of Advanced International Studies, Johns Hopkins University, and Senior Fellow at the Center for International Development, Stanford University