Last month, President Trump threatened to impose tariffs on Mexico unless the country took a more active role in helping block Central American migrants from reaching the U.S. border. His threat was fairly specific: If Mexico were to give migrants free passage, the United States would “be forced to Tariff at 25% all cars made in Mexico and shipped over the Border to us.”
There was just one problem with that plan. As trade lawyer Daniel D. Ujczo told the Associated Press, part of the process of negotiating a revised trade agreement with Canada and Mexico included a side letter that specifically prohibited the United States from imposing tariffs on automobiles. While the trade agreement, the U.S.-Mexico-Canada Agreement or USMCA, hasn’t been ratified, the side letter is already in effect.
“Mexico ‘Trump-and-Tweet-proofed’ its auto sector,” Ujczo said. If the White House wanted to impose tariffs, he added, it would “need to get very creative."
The White House got creative.
On Thursday evening, Trump tweeted his new plan. As it stands, a 5 percent tariff on goods imported from Mexico will go into effect on June 10 “until such time as illegal migrants coming through Mexico, and into our Country, STOP,” Trump wrote. If the problem continues, the tariff rate will increase 5 percent every month to a cap of 25 percent.
We’ll note at the outset that this threat — and it is still a threat, given the June 10 start date — depends to a large extent on a subjective assessment of what Mexico is doing. There’s no way for Mexico to block “illegal migrants” to the United States, since migrants haven’t broken U.S. law until they actually enter the country illegally. (What’s more, many migrants turn themselves in at border checkpoints to claim asylum, an entirely legal move.)
The official White House statement makes clear that this is subjective: “If the illegal migration crisis is alleviated through effective actions taken by Mexico, to be determined in our sole discretion and judgment,” the tariffs will be removed.
So how’s the White House applying these tariffs? By invoking Trump’s U.S.-Mexico border national emergency declaration.
“Mexico’s passive cooperation in allowing this mass incursion constitutes an emergency and extraordinary threat to the national security and economy of the United States,” the statement reads. The tariffs will be imposed through use of the International Emergency Economic Powers Act, a tool that’s been at the center of a number of other national emergency declarations that have imposed economic penalties on foreign countries in the past.
“IEEPA’s never been used in this way,” Ujczo said when we spoke by phone Friday morning. “There has never been a scenario where a president has used IEEPA to put on tariffs on a specific country. We’ve completely banned goods from a specific country like Nicaragua recently, but we’ve never used this for tariffs. So this is uncharted territory at the present time.”
Since the threat hasn’t been implemented, there are still questions about how the tariffs would apply. Ujczo noted that, because the tariffs are slated to be applied under IEEPA, the side letter with Mexico wouldn’t apply. And therefore, the automotive industry — including in Ohio, where he’s based — could be at risk.
“I could care less about avocados right now,” Ujczo said. “What I care about is transmissions and circuit boards and everything else.”
Data from the Census Bureau suggest that trade focused on automobiles (engines, engine parts, auto bodies, tires and other parts and accessories) made up about 17 percent of imports from Mexico in 2018 and about 12 percent of exports. Overall, about 15 percent of trade between the two countries fell into those categories.
Some auto manufacturers ship unfinished components to Mexico where they are completed and sent back to the United States: Would those be affected by Trump’s tariffs, Ujczo wondered?
The graph above obscures how significant Mexico is as a trading partner of the United States. Our four biggest trading partners are Mexico, China, Canada and Japan — but trade in goods with the first three is much more significant.
In March, the United States imported $31.3 billion in goods from Mexico. Applying a 5 percent tariff across the board is, in effect, a tax of $1.6 billion. Some part of that would be paid by manufacturers willing to absorb the cost — but much of it would be absorbed by American consumers.
When Trump, in early 2017, threatened to apply a tariff on goods from Mexico as a way of having Mexico pay for a wall on the border (which, of course, wouldn’t be Mexico paying for the wall), the Trade Partnership estimated that a 20 percent tariff could cost 750,000 American jobs. Under Trump’s current proposal, unless the White House decides that Mexico is meeting its subjective standard, we’d hit 20 percent tariffs in September. If the estimate is correct, the United States would give up one out of every eight jobs that has been added since Trump was inaugurated.
Ujczo worries about even broader effects.
First, he expects that applying tariffs will have the effect of shutting down cross-border traffic. Resources on the border are already stretched thin with the surge in migrants. Having to evaluate tariffs for goods crossing into the United States — something that isn’t part of the import procedure, since there’s no tariff — will slow the process of bringing products in. (The problem of border congestion will probably be immediate, he figures, given that manufacturers will have an incentive to try to get products into the United States in the next 10 days, before any tariffs apply.)
Then there’s the problem of existing contracts. Contracts often include stipulations that the contract is void in the event of war or natural disaster.
“There’s going to be a very real legal question if a declaration of a national emergency is tantamount to an act of war under force majeure,” Ujczo said, using a term of art referring to those types of contractual clauses. For a company that has a contract with a Mexican supplier that suddenly got 5 or 25 percent more expensive, it may be tempting to try to exercise that escape clause. “What does that do to the economy if you have contracts being voided left and right?” Ujczo asked.
We aren’t there. We’ve seen plenty of examples of Trump making threats that subsequently aren’t enacted — including threats related to the border.
If this particular threat does go into effect, though, the ramifications will be severe — and, perhaps, hard to predict.