President Trump’s latest foray into trade policy is notable for its economic recklessness (it could tip Mexico into a recession, followed perhaps by the United States), its gratuitous insults of a close ally (Mexico) and its rank opportunism. (It would shift power to the White House from Congress.)
The timing of Trump’s policy is especially offensive. Earlier, Mexico, Canada and the United States had negotiated a successor to the North American Free Trade Agreement (NAFTA); the new arrangement is called the United States-Mexico-Canada Agreement (USMCA). Mexico and Canada were preparing to ratify their agreements; the Trump administration was trying to assemble the necessary support.
The betrayal resembles a marriage in which one of the betrothed doesn’t show up for the wedding. “Unless the Congress intervenes or Trump changes his mind, the new USMCA is dead,” wrote Edward Alden, a trade expert at the Council on Foreign Relations, in a blog post.
The implications extend beyond Trump’s proposal, Alden argued. The White House has cited the International Emergency Economic Powers Act (IEEPA) of 1977 as authorizing Trump’s ultimatum, but Alden says that law aimed to cover “unusual and extraordinary threats” as opposed to giving the president “carte blanche authority to impose tariffs on close allies.”
Moreover, Alden added, “no other country — no matter how closely allied or how dependent on the United States — will be willing to negotiate any agreements with this administration, knowing they can be torn up at the whim of the president.”
There is a sheer nastiness to Trump’s proposal that seems to ignore the fact that, counting services (tourism, transportation) and trade with Canada, the U.S. trade deficit with the NAFTA countries was only about 5 percent ($66 billion) on total trade of $1.385 trillion in 2018, according to government figures from the Office of the U.S. Trade Representative.
If Trump’s tariffs do go into effect, the impact on Mexico’s economy could be devastating, according to Shannon K. O’Neil, also of the Council on Foreign Relations. The economy has already slowed, she said, and is highly dependent on trade, which equals 38 percent of the economy.
In another indication of how vulnerable economic growth may be in the NAFTA countries, Federal Reserve Chair Jerome H. Powell suggested that the Fed might ease monetary policy to offset any adverse effect from Trump’s tariffs. The stock market rallied strongly on the news.
But whether Powell’s pledge is sensible economic policy is an open question. Implying that the Fed can — and should — ease monetary policy to offset the possible hazards of Trump’s trade policies puts the Fed in an uncomfortable position. If the Fed does nothing, it increases the odds of a recession. If the Fed takes action, it seems to support Trump’s trade views. There are drawbacks no matter what it does or doesn’t do.
“If the Congress lets Trump get away with this, he will be free to slap tariffs on any country or any product at any time for whatever reason he dreams up. Congress’s constitutional authority over trade will be utterly hollow.”
Read more from Robert Samuelson’s archive.