U.S.-Mexico: Tariffs, Threats, and Trade Agreements

By Ken Shadlen*

Cargo ships

Cargo ships off shore of Galveston Island, TX / Jocelyn Augustino / Creative Commons / https://commons.wikimedia.org/wiki/File:FEMA_-_38860_-_Cargo_ships_off_shore_of_Galveston_Island,_TX.jpg

The United States’ threat last week to apply tariffs on imports from Mexico, unless Mexico revamped its approach to Central American migrants passing through the country, underscores the power asymmetries in the global economy – and undermines the credibility of U.S. trade agreements elsewhere. President Trump threatened to abrogate U.S. commitments under NAFTA (and the WTO) unless Mexico introduced measures in an area that is not addressed by NAFTA. While the tariffs won’t be applied, at least not now, and there is debate about just how much Mexico changed its migration policies as a result of Washington’s maneuver, the linkage between trade and “non-trade” issues such as immigration, especially within preferential trade agreements such as NAFTA, have deep implications for the political economy of international trade.

  • Many critics of Trump’s threats claim that immigration policy and trade policy are distinct, and that it makes no sense for the administration to link the two. But this misses the point: what is and is not “trade” is determined politically. Since the 1980s, the United States has conditioned market access on the introduction and enforcement of a wide range of “trade-related” policies, including investment, intellectual property, government procurement practices, and so on. Market size confers to the importing country the power to define what constitutes “trade,” and the definition of “trade” thus has changed according to Washington’s preferences. In that sense, Trump’s linkage maneuver is not at all new.
  • On the one hand, NAFTA is the outcome of massive linkage of this sort, as Mexico was required to introduce extensive changes to policies and practices in a range of trade-related policy areas in order to qualify for the agreement. On the other hand, NAFTA was meant to protect against further “ad hoc linkage,” with new conditions attached at the whim of the United States.
  • Prior to NAFTA, Mexico’s exports largely entered the U.S. market under the Generalized System of Preferences (GSP), which offers preferential market access to exports from developing countries under a wide range of conditions. But GSP preferences can be withdrawn unilaterally, and, as the importing country, the United States changed GSP preferences in response to its changing sentiments. Beneficiary countries always ran the risk of having the U.S. Congress and Executive attach additional conditions to the program, like ornaments on a Christmas tree.
  • NAFTA and other NAFTA-like trade agreements that have followed promised to deliver substantially more predictability and stability than the GSP.

Recent events question these premises. In 2017-18, Trump warned that Washington would withdraw entirely from NAFTA unless it was renegotiated on terms more to his liking. Last week’s threat to remove preferential market access unless Mexico changed its immigration policies and practices is precisely the sort of behavior that NAFTA was meant to protect against. The agreement supposedly replaced the unstable preferences of GSP, which were always vulnerable to the whims of U.S. politicians, with a new set of preferences that were clearly defined, had fixed conditions, and were less prone to being unilaterally withdrawn. But evidently it didn’t.

Washington’s actions are similar to if the Mexican government announced it would stop enforcing copyrights and patents of U.S. firms, unless the United States were to substantially increase science and technology assistance to help upgrade the stock of biologists, chemists, and engineers in Mexico. The reaction to such an announcement would be ridicule, and Washington would claim NAFTA (and the WTO) binds Mexico to protect intellectual property. The United States would assert, moreover, that its science and technology assistance is not covered by NAFTA; Mexico’s threat would elicit no change of behavior on the part of the US. 

  • Beyond NAFTA per se, these events make one wonder why any country would sign a trade agreement with the United States. After all, if countries already have preferential market access under the GSP, then one of the main benefits of reciprocal trade agreements is to lock-in and stabilize those preferences – even with the need to make substantial concessions on “trade-related” policy areas. If, in reality, only half of the bargain is locked in, if the benefits can be made to disappear at the whim of the U.S. President, then for many trading partners the benefits of such agreements will be unlikely to compensate for the costs.

June 11, 2019

*Ken Shadlen is Professor of Development Studies and Head of Department in the Department of International Development at the London School of Economics and Political Science.