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Donald Trump’s latest threat to introduce new tariffs on Mexican goods unless Mexico solves the Central American refugee outflow is a blunder that puts the U.S.’s longstanding relationship with its southern neighbor at risk. Up until now Mexico’s populist president Andres Manuel Lopez Obrador (AMLO), has tried to govern as a charismatic centrist, promising poor, rural constituents a radical transformation of Mexico’s economy and society but also working to assure business chambers and foreign ratings agencies that he intends to preserve macroeconomic stability, fiscal stability, and work within Mexico’s current arrangement of free trade deals. Even as he routinely bashes the errors of the “neoliberal” policy agenda Mexico has pursued for the past three decades, AMLO has continued to voice nominal support for NAFTA, the landmark trade agreement that links Canada, the U.S., and Mexico. As he announces a government funding tree-planting initiative and piecemeal agricultural support programs, AMLO is also prodding his country’s legislature, which his party dominates, to pass the USMCA, the update to the NAFTA trade deal that Trump fought for.
AMLO is a charismatic but quick-tempered old school politician. Thus far he has showed incredible restraint in his dealings with the Trump administration. He has only responded to Trump’s provocations and insults with diplomatic platitudes about preserving the friendship between neighboring countries. But Trump’s latest temper tantrum over Central American refugees and threat to slap new tariffs of up to 25% on Mexican exports to the U.S. may open up an interesting opportunity for Mexico to retaliate. Trump has long claimed to champion U.S. industry and support U.S. jobs, but over the last few weeks he’s shown that he prioritizes building his border wall and blocking the arrival of asylum-seekers above all else. While some Republican leaders have voiced their support for Trump’s capricious policy agenda and endorsed his threat to introduce new punitive tariffs on Mexico, at the local level in many parts of the south and mid-west business leaders may be more concerned with the future of the US-Mexico economic relationship.
Glenn Hamer, the president and CEO of the Arizona Chamber of Commerce and Industry, called Trump’s latest tariff threat “baffling” and explained, “it completely contradicts the spirit of NAFTA, not to mention the USMCA that we’re attempting to ratify.”
Trump is going to have to decide whether or not he wants to preserve the U.S.’s existing economic relationship with Mexico. Trump looks at the history since the NAFTA deal was signed in the early 1990s as a time where U.S. industry stagnated and struggled. Trump doesn’t seem able to comprehend that his counterpart in Mexico is also skeptical of NAFTA. In Mexico AMLO has long criticized the “neoliberal” policies of the past three decades as killing rural Mexico’s agricultural economy. The influx of cheap, factory-farmed corn from the U.S. has made it impossible for small-plot farmers in rural Mexico to profitably produce their traditional maiz. On the campaign trail before his landslide victory in 2018 AMLO promised to introduce new price supports to help rural corn producers. Under current trade rules, government-funded agricultural subsidies are a complicated and controversial topic. Within the current World Trade Organization and NAFTA framework it could be difficult for AMLO to introduce an ambitious program of government support that would have the potential to fulfill AMLO’s ambitious agenda to re-activate Mexico’s rural economy. But, Donald Trump is setting a precedent that existing trade arrangement comes second to domestic politics and national priorities. AMLO could use this opportunity to focus on his own pet project of helping Mexico’s myriad corn producers by introducing tariffs on U.S.-produced corn and creating new price supports to aid Mexican production.
Donald Trump does not seem to understand that NAFTA slashed tariffs on agricultural products and opened Mexico as a market for US producers. Mexico currently imports over $4 billion worth of corn from the U.S. every year. Mexico is now the top export market for U.S. corn. Trump seems to have forgotten that corn-belt states such as Missouri, Kansas, Iowa and Nebraska voted for him in 2016. If Trump insists on playing hardball with Mexico and using tariffs as a threat, Mexico can turn to corn as an issue that would put pressure on Trump’s Republican base in the short term, and in the longer term could emerge as a policy priority for AMLO and his team.
Former New Mexican governor Bill Richardson explained, “Mexico is going to have to retaliate if we pursue this foolish policy. It’s going to affect our economy. Mexico is going to put sanctions on our products, too.”
Trump wants to play at tariff brinkmanship, assuming that he can bully his way towards squeezing concessions from Mexico and other countries. But, if the future of the current trading arrangement is in doubt, AMLO may want to capitalize on an opportunity to fight for his own domestic agenda and use corn tariffs to help protect local producers. If AMLO decides to introduce tariffs on U.S. corn and create new supports for local farmers, he could end up beating Trump at his own game. Farmers in the U.S. are already feeling the pinch from declining Chinese imports of U.S. soybeans. Disruption of corn exports to rural Mexico would be a major problem for the U.S. agricultural sector and companies such as AGCO, Bunge Limited, CF Industries, Archer Daniels Midland, Caterpillar, and Deere.
On June 3, economist Paul Krugman tweeted “unlike much of Trump’s agenda, his tariffs don’t have a constituency — they’re just his personal obsession.”
If Mexico threatens to place retaliatory tariffs on U.S. corn, Trump may be forced to find out how many of his supporters actually share his misguided policy priorities.
June 4, 2019 at 08:34AM
Forbes – Entrepreneurs