Category Archives: Trade

Trump Threatens up to 25 Percent Tariff on Mexican Goods, Jeopardizes NAFTA/USMCA

Things have been moving quickly on President Trump’s top legislative priority, the NAFTA/USMCA trade agreement. The key was rescinding steel and aluminum tariffs against Canada and Mexico. On Wednesday, Canadian Prime Minister Justin Trudeau moved to introduce the agreement to Canada’s legislature for ratification, prompting a Thursday visit from Vice President Mike Pence. Also on Thursday, Mexican President Andres Manuel Lopez Obrador introduced NAFTA/USMCA in Mexico’s Senate. He is requesting that the body, on recess until September, hold a special session to ratify it.

Within hours of Lopez Obrador’s announcement, President Trump may have torpedoed his own agreement. Shortly after markets closed, he threatened, via Twitter, a new tariff against Mexico that would dwarf the steel and aluminum tariffs:

1/2: On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied,..

2/2:….at which time the Tariffs will be removed. Details from the White House to follow.

On July 1, the 5 percent tariff would rise to 10 percent. It would then rise by an additional 5 percent at the beginning of each month until reaching 25 percent on October 1. It would remain there until President Trump is satisfied with Mexico’s immigration policies. He did not set specific criteria for Mexico to meet. And as mentioned earlier, Mexico’s Senate is out of session until September. But the administration’s statement indicates that this threat isn’t entirely about immigration (capitalization of “tariff” and typewriter-era extra spacing between sentences in original):

If Mexico fails to act, Tariffs will remain at the high level, and companies located in Mexico may start moving back to the United States to make their products and goods.  Companies that relocate to the United States will not pay the Tariffs or be affected in any way.

By way of context, this tariff would be nearly twice as large as the recent 25 percent tariff on $200 billion of Chinese goods. Mexico annually exports roughly $346.5 billion of goods to the United States.

NAFTA and the NAFTA 2.0/USMCA both require near-zero tariffs among the three member countries. Trump has invoked the Jimmy Carter-era 1977 International Emergency Economic Powers Act as legal authority for the tariffs, claiming that that bill’s emergency powers supersede possible NAFTA violations.

As I’ve mentioned before, Trump has a habit of using dramatic last-minute threats as a negotiating tactic. Sometimes he follows through, as with the recent 25 percent tariff on $200 billion of Chinese goods. Sometimes he withdraws, as he did with a threat to close the entire U.S.-Mexican border, and an April threat of a 25 percent tariff on Mexican-assembled automobiles—which are often made largely of U.S.-made parts.

For obvious reasons, a new tariff against Mexico will not make its government more likely to ratify NAFTA/USMCA. Tariffs are usually met with retaliatory tariffs, not the policy action Trump wants. The U.S. economy is risking yet another instance of double damage from President Trump’s announcement—once from his tariffs, and again from retaliatory tariffs.

Further complicating matters, Mexican President Lopez Obrador largely shares Trump’s negative view of free trade. His support of NAFTA/USMCA is not deeply held. His going along with the agreement is largely a kindness to his predecessor, Enrique Peña-Nieto, who negotiated the agreement and signed it on his final day in office. Lopez Obrador’s NAFTA/USMCA support is easily lost, and this tariff gives him an easy out.

The tariff also complicates matters in America. Also on Thursday, President Trump issued a Statement of Administrative Action. This opens a 30-day waiting period, after which Trump can send NAFTA/USMCA to Congress at any time for a mandatory ratification vote within a set period (Politico has a handy timeline). Members from both parties opposed the steel and aluminum tariffs, and they will likely oppose the new tariff, which is potentially much larger. If Congress is required to vote, it may well vote no due to the new Mexico tariffs.

Democrats already hold the upper hand in negotiations due to the administration’s high prioritization of a low-stakes agreement; USMCA contains no major changes to trade policy. Even without Trump’s tariff threat, they could hold up the agreement to add trade-unrelated provisions to benefit favored labor and environmental constituencies. Or they could condition ratification on a more important matter, such as must-pass appropriations bills or other Democratic policy priorities such as health care or the minimum wage.

A new tariff is Trump giving Democrats free ammunition to hold up not just NAFTA/USMCA, but other administration priorities as well.

We’ll find out by June 10th if Trump walks back a major economic and political mistake, or goes through with it.

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On the Radio: Metal Tariffs and NAFTA/USMCA

I’ll appear on the Jim Bohannon Show tonight at 10:00 ET to talk about President Trump’s decision to ease steel and aluminum tariffs against Canada and Mexico, and how it will impact the NAFTA/USMCA trade agreement.

Trump Mostly Removes Steel, Aluminum Tariffs against Mexico, Canada: Barriers Still Higher than in 2017

The Trump administration is mostly lifting its steel aluminum tariffs on Canada and Mexico, effective 48 hours from today’s announcement. But metal tariffs will remain higher than they were just 14 months ago. They have raised consumer prices for carshousing, and washing machines, while preventing passage of President Trump’s signature revised NAFTA/USMCA trade agreement. Even now, passage is not guaranteed.

Retaliatory tariffs from Canada and Mexico also remain in place as of this writing (Update: Canada and Mexico are removing them, per The Wall Street Journal). The metal tariffs, enacted on national security grounds, will remain in place against Europe and Japan, which are both U.S. allies.​

Canadian and Mexican companies will also face a new compliance burden. They will have to monitor and report their steel and aluminum sources to ensure they are not re-exporting too much metal from China.

The tariffs were overkill as a negotiating tactic for the NAFTA/USMCA agreement, which would have little impact on trade. It will slightly raise car prices, slightly lower dairy prices, and have a few anti-China provisions of likely dubious effectiveness—and that’s about it.

Over these small potatoes, GM, and Ford are each reporting billion-dollar losses related to tariffs. Farmers, a core key part of Trump’s support base, are being hit just as hard, with the administration floating tens of billions of dollars of wealth transfers to shift the blow onto other demographics. The steel industry has benefitted some, but only at steel-using industries’ direct expense, and an estimated cost of $900,000 per job saved.

All this was avoidable. If anything, Mexico and Canada may have been willing to go through with USMCA formalities as a gesture of goodwill towards the U.S. president, who views it as an important political victory despite the low stakes. Instead, Trump’s tariff strategy turned an easy process into a combative, protracted negotiation for no good reason, while trade barriers remain higher than in 2017.

Good news today, but keep it in context.

Boeing Pushes 100 Percent Tariffs on Airbus

Boeing, fresh off a victory in restoring the Export-Import Bank’s full lending authority, is floating the idea of a 100 percent tariff on Airbus aircraft and parts. Airbus is Boeing’s largest competitor. There are four factors in play here. The first three are public relations, the opportunity costs of cronyism, and how best to pursue a level playing field in the global economy. The fourth is the likely retaliation such a move would spark.

From a PR standpoint, Boeing wants to move public attention away from its safety issues with the Boeing 737 MAX aircraft. Most of the press Boeing gets for Ex-Im and Airbus tariffs will be negative, and the company knows this. It would still likely prefer that people be upset about those than about its safety problems, which are an existential threat to more than just airline passengers.

To that point, Boeing arguing for an Airbus tariff right now is almost perfect news cycle timing. The China trade dispute and NAFTA/USMCA are hot stories. Just today, President Trump announced a six-month delay on a possible European auto tariff, which will both keep that story alive for a while and give Boeing time to fold an Airbus tariff into a possible action.

Boeing also has a Baptists-and-bootleggers story at the ready. The World Trade Organization ruled, correctly, that Airbus received unfair government subsidies when it launched its A350 and A380 aircraft. Under WTO rules, the U.S. is entitled to retaliate. But just because it can, doesn’t mean it should. An Airbus tariff is highly unlikely to spur needed reform.

This ties into the opportunity costs of cronyism. Boeing puts significant resources into lobbying for Export-Import Bank support, Airbus tariffs, and other preferential policies. All of those resources are not being used to address the 737 MAX safety issues. This might improve a decimal point somewhere in a quarterly earnings report in the short term. But Boeing’s misplaced priorities could cause long-term harm to both aviation safety and Boeing’s own competitiveness. Competing in Washington is not the same thing as competing in the marketplace. Boeing’s investors should be upset at the company’s behavior.

Companies that engage in heavy rent-seeking are less profitable than more market-oriented companies. Even in Boeing’s case, the most profitable years in company history happened when Ex-Im was unable to offer its usual financing.

Which brings up the third point: It is not enough to have a level playing field. That level must be raised, not lowered. Boeing is right that Airbus’ massive government subsidies are unfair. But the way to address the problem is not to copy Europe’s policy mistakes. Don’t sink down to their level, raise them up to ours—though, admittedly, our own level of cronyism has much room for improvement. But reformers must start somewhere.

If anything, Boeing might have an interest in further tying up Airbus in webs of subsidies and favorable regulations—though I would strongly disagree with this strategy. Government protection tends to cause sclerosis in its beneficiaries, and Boeing should be pleased at the long-term implications of Airbus’ comfort. I am not a fan of this zero-sum thinking, but Boeing might be. Even from their self-interested perspective, an Airbus tariff is a bad idea.

Finally, as I pointed out yesterday, tariffs are nearly always met with retaliation, not cooperation. The European Union almost certainly will not change its tune on Airbus subsidies in response to a U.S. tariff—especially in a global market with many non-U.S. customers. Europe will harden its stance, likely at Boeing’s expense.

Given how tense global trade relations currently are, even if Boeing is just blowing PR smoke, this is a bad time to do it. Better for the company to refocus on making safe, innovative products than spending its resources on a political game with no winners.

See also relevant CEI scholarship on trade, the Ex-Im Bank, and the ethics of rent-seeking.

Trade War State of Play: China, USMCA

If President Trump’s trade war has a single takeaway, it is this: Raising tariffs is an ineffective bargaining strategy. When the U.S. raises its tariffs, other countries always retaliate, and always become less cooperative. Trump’s tariff-heavy bargaining strategy is harming both of his top trade priorities, China and the new NAFTA/USMCA trade agreement.

Right now, the big news is another round of tit-for-tat in the U.S.-China dispute. On the night of Sunday, May 4, right before a week of high-level negotiations, President Trump threatened a 25 percent tariff on $200 billion of Chinese goods if the two governments did not reach an agreement by the following Friday, May 10.

Trump has made drastic last-minute threats in the past as a tactic to speed up negotiations and move them in his favor. Sometimes he follows through. But often he withdraws, as when he recently threatened to shut down the U.S.-Mexican border and quickly backed off. He considers it an advantage for such follow-through to be unpredictable.

This time he followed through. But the Chinese government did not accede to his demands. Instead, it is raising its own barriers against U.S. products. Every one of Trump’s tariff increases so far has been met with retaliation, not cooperation. The strategy does not work.

Another round of trade talks is likely in the next few weeks. President Trump, in line with his established strategy, is mulling extending tariffs to all Chinese imports if matters are not settled soon. It is safe to predict that another tariff will garner the same response as all of its predecessors. The pattern was set long ago. With Trump unlikely to change his stripes, it is well past time for Congress to retake the taxing authority it delegated away to the president back in the 1960s and 1970s. Absent such reform, the U.S.-China trade war could be long-term.

China is not the only dispute in which Trump’s tariffs are blocking his goals. The president’s top domestic priority is passing the new NAFTA/USMCA trade agreement. The biggest remaining sticking point there is Trump’s steel and aluminum tariffs. These are meant in part to get Mexico and Canada to acquiesce to U.S. negotiation demands. Instead, the tariffs are causing holdups and resentments in both countries— and in Congress.

For legal reasons, the tariffs were enacted on national security grounds. Mexico and Canada are both offended that a close ally is publicly calling them national security threats. They are withholding cooperation. Back home, many congressional Democrats and even some Republicans want the steel and aluminum tariffs repealed as a condition for ratifying the agreement. Trump, so far, is unwilling to agree. Members of Congress are also using tariff repeal as a bargaining chip for non-trade issues where the president needs congressional cooperation. This could stymie administration agenda items well outside of trade.

President Trump has two options going forward. He can double down on his mistakes, or he can change to a strategy that does work. A positive change would involve repealing the problem-causing tariffs, reengaging the World Trade Organization’s dispute resolution process, and re-joining the Trans-Pacific Partnership. Of course, such a change would require significant creativity in PR framing in order to save face on Trump’s end, but smart diplomats on all sides can find ways to do so.

Unfortunately, the president is committed to his tariff strategy and likely will continue to double down on failure. This creates an important role for both parties to play. Democrats need to check an executive branch run amok and affirm their principles of dynamism, openness, and economic inclusiveness. Republicans from the free-market wing of the party need to give their longstanding principles a higher place than they currently give to an outlier personality who will disappear from the political scene in 2025 at the latest.

This post has focused mostly on political strategy. It is well-established that tariffs are even more harmful to the U.S. economy than they are to U.S. foreign policy interests.

For more on that side of the issue, see Iain Murray’s and my study, “Traders of the Lost Ark.”

China Retaliates to U.S. Tariff Increase

A story in Canada’s The Globe and Mail (unfortunately behind a subscription paywall), quotes me on the latest tariff increases in the U.S.-China trade war:

Ryan Young, a senior fellow at the free-market think tank, Competitive Enterprise Institute, said Mr. Trump’s negotiating strategy has “backfired badly” and he will have to change course to reach a resolution. Mr. Young said Congress should try to take away Mr. Trump’s authority to impose levies.
Mr. Young said better options for dealing with China’s behaviour would be suing Beijing through the World Trade Organization and joining the Trans-Pacific Partnership, a Pacific Rim trade pact meant to contain China’s influence.
“The President has the order wrong – he says ‘ready, fire, aim,’” Mr. Young said. “Trump can’t be trusted with tariff authority.”

Trump Threatens New China Tariff with May 10 Deadline

On Sunday, President Trump announced via Twitter that if he does not approve of the results of this week’s U.S.-China trade talks, he will enact a new tariff on Friday, May 10th. It would raise a current 10 percent tariff on $200 billion of Chinese goods to 25 percent. He threatened a similar tariff late last year, but backed off. China, in response, might withdraw from the talks altogether.

This week’s trade talks, set to begin Wednesday, were expected to conclude by Friday anyway, though without a hard deadline.

Trump has a history of using drastic threats as a negotiating tactic, only to quickly back off. In addition to threatening and backing away from the same China tariff last year, he has also backed off of threats to shut down the U.S.-Mexico border and to enact tariffs against European automobiles on national security grounds.

If Sunday’s tweets are just the latest iteration of an established pattern, consumers will have little to worry about. But if Trump follows through, those same consumers should be aware of Trump’s tenuous grasp of how tariffs work. His two tweets read:

1:  For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars….

2: ….of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!

To which I responded—with my apologies for a dumb grammatical error (that’s Twitter for you):

Chinese producers doesn’t pay the tariffs. American consumers do. Chinese companies sell goods at the same price and profit margins. U.S. consumers then pay the tariff when they make the purchase.

President Trump has a fundamental misunderstanding of who pays tariffs, and that matters for his policy aims. He has made this mistake before, and his advisors are apparently unable to shake him of it despite repeated “Groundhog Day” meetings.

As for tariffs helping the economy, that is also false. When people have to pay more money to get the same goods as before, they have less left over to spend on other goods, or to save and invest. This means tariffs not only reduce consumption, they shrink available capital for U.S. entrepreneurs, startups, and homebuyers.

Writ large, the Trade Partnership estimates that if President Trump goes through with the 25 percent Chinese goods tariff, and China retaliates in kind per usual, total tariffs would cost up to 1.04 percent of GDP. That comes to $2,389 per year for a family of four.

There is a policy action Congress can take immediately to prevent further tariff abuses. The China tariffs are enacted under Section 301 of the Trade Act of 1974; Congress should repeal that section. For more on that, see the trade chapter in CEI’s “Free to Prosper: A Pro-Growth Agenda for the 116th Congress.” For more on the larger case for free trade, see Iain Murray’s and my study “Traders of the Lost Ark.”