A Tariff, Gone Too Far…

Later today, Mexican Foreign Minister Marcelo Ebrard, United States Vice President Mike Pence and U.S. Secretary of State Mike Pompeo will meet regarding the Trump administration’s announcement that they will apply 5 percent tariffs on all goods coming from Mexico (set to start on June 10), if Mexico does not stop migrants from reaching the United States. It’s a dramatic shift in U.S. policy for addressing trade and immigration, and also represents a move away from the traditionally compartmentalized bilateral relationship where each issue is dealt with separately—a topic about which I recently spoke with Neil Cavuto, Fox Business News.  

Beyond breaking with tradition, the tariffs are simply a bad idea. Mexico is one of the United States’ largest trade partners, and hundreds of billions of dollars in pieces, parts, energy products, fruits, and vegetables cross the border each year. These tariffs—combined with Mexico’s likely retaliatory ones—will only increase costs that will hit U.S. companies’ bottom lines and consumers’ wallets at a time when the U.S. economy appears to be slowing. The economic pain may not even stop there, since the tariffs could be increased by 5 percent a month to reach 25 percent in October, a point I made in my interview with Bloomberg’s David Westin.  And the move hasn’t been met with open arms as both Democrats and Republicans in Congress have expressed frustration with the plan.

The trigger behind these tariffs is the number of migrants arriving at the U.S.-Mexico border over the past few months. During both March and April, the U.S. Border Patrol apprehended more than 90,000 people a month—almost double the numbers at the end of 2018 and the highest monthly levels in the past ten years. It’s not entirely clear why the numbers have increased so quickly, but it likely reflects a range of factors, including bleak conditions in Central America, quick processing times and releases at the U.S. border, and a feeling that ‘the border could close’ at any point so people should arrive now. While Mexican President Andrés Manuel López Obrador’s administration first provided humanitarian visas to thousands of Central Americans arriving in the country, Mexico is now more focused on an enforcement approach. Over the past two months alone, it has apprehended around 40,000 migrants.

Overall, the situation at the border is certainly a challenge. It strains the Border Patrol agents who are the first line responders and creates humanitarian crises in Mexican border communities and even U.S. processing centers. Yet, tariffs are not the right response. Addressing these issues requires a partnership with Mexico and joint assistance for Central America. It requires a response that addresses Central America’s insecurity, lack of employment opportunities, and unpredictable weather and droughts. U.S. policy needs to be targeted toward reducing these demand factors and addressing our own domestic issues that drive the crisis, such as slow asylum processing, insufficient immediate support for CBP at the border, and few legal pathways for workers or potential immigrants from the region. In short, an approach that addresses immigration challenges with immigration policies, not punitive tariffs. 

Yet the tariffs do more than just directly affect U.S. economic conditions, they also imperil the U.S.-Mexico-Canada trade agreement (USMCA). The agreement has been steadily winding its way through legislative reviews in the United States and awaiting its presentation to the U.S. Congress. To speed up the voting process, the White House began a process last week that would allow the USMCA to be submitted to Congress within the next 30 days. This dovetails with the Trump administration’s messaging that it wants to put the agreement to a vote as soon as possible. Yet congressional democrats have criticized a faster pace, noting that they want additional time to review the agreement and assurances that there will be a focus on labor and environmental policy. The recent removal of U.S. aluminum and steel tariffs for Canada and Mexico had been a positive step forward, clearing a path for the agreement. Yet these new tariffs appear to put additional pressure back on the congressional negotiations. For more information, I recommend this White & Case trade alert.

In particular, the tariffs could have a significant affect on Mexico’s energy sector and disrupt the $50 billion bilateral energy market. In 2018, the U.S. imported over $15 billion in energy products, mostly oil, and any tariffs will be passed along to the consumers. This uncertainty comes alongside other shaky energy news in Mexico. This week, the head of Mexico’s electricity regulator (CRE) announced that he will be leaving the position after three years. While López Obrador Dos Bocas refinery continues to be wrapped in doubt, the refinery continues to be a centerpiece of the administration’s policy agenda. In May, an invitation-only tender for the refinery’s construction led to all four invitees claiming that they couldn’t build the refinery in the administration’s expected time frame or within the $8 billion limit. In response, the refinery construction job was handed to Pemex, which is charged with building the refinery in three years with a budget of $7.7 billion. 

The Andrés Manuel López Obrador government has also faced other challenges. Over the last several weeks, the administration has developed an increasingly tense relationship with the country’s media (on showcase at the daily morning press conferences) and faced medicine shortages throughout the country’s healthcare system. On this last point, the head of the country’s largest public health provider (IMSS) stepped down in late May, citing pressure on the agency to cut staff and costs that were affecting its ability to provide services. Meanwhile, other signature infrastructure policy pushes—the Train Maya and the cancelled airport and new replacement—have all been expensive, slow moving, and with environmental or logistical concerns. Yet, despite the rocky start, the president’s party MORENA continues to be popular, winning the recent state elections in Puebla and Baja California.

Amid the precarious bilateral relationship, I’ll be watching how these issues evolve. I hope to hear from all of you about how the tariffs and other policy shifts are affecting you and your business through FacebookTwitter, or LinkedIn

Antonio Garza