Trump's Tariff Hammer Will Unearth Some Very Rusty Nails
As the old joke goes, those who wield only hammers see every problem as a nail. And the Trump tariff threat is a hammer par excellence, having been directed toward Mexico in terms of reducing the flow of central American emigrants toward the southern U.S. border. The view of many that this threat “succeeded” is heavily myopic, and the longer-term damage will be real; as discussed below, the only way to limit it will be to finalize and implement the U.S.-Mexico-Canada Free Trade Agreement.
Moving forward, the limiting principle that now applies to the objectives toward which the tariff hammer will be directed is wholly unclear. It is no longer merely foreign protectionism and other such issues that more-or-less are subsumed under the heading “normal trade frictions.” Instead: The tariff threat now is available in principle to be directed at far more than the immigration/refugee problem. All that is needed is an “emergency,” a term that is nothing if not elastic. The list of such potential issues and complaints is endless. Are other members of the various military alliances contributing too few resources to defense? Are human rights being violated too egregiously by some government? Has some government failed to support the U.S. in an important vote at the UN? Has some other government used local courts corruptly so as to confiscate the assets of an American business? Can anyone believe that the domestic political pressures for tariffs will not increase as the potential rationales expand?
Notice that anyone can play this game. Is the U.S. government failing to treat the climate “crisis” (an aside: there is no such crisis) with sufficient seriousness? Are U.S. taxes too low, thus making it difficult for foreign governments to raise their own? (When international bureaucrats call for tax “harmonization,” they actually mean a tax cartel.) Are U.S. export subsidies (merely consider the Export-Import Bank) or penalties on foreign exporters justified on the basis of the dubious “dumping” regulations unfair? The list of frictions afflicting American relations with foreign governments is endless, ranging from the trivial to the profound, and the presence of such innumerable disputes is the normal condition of international relations. The extension of the tariff threat to new controversies---there is no obvious principle that limits its use---carries adverse implications that seem not to be recognized in the White House and other parts of the Beltway.
Amid the applause being directed toward the “success” of Mr. Trump’s tariff threat toward Mexico, a basic truth needs to be kept in mind. International trade is a fundamental component of aggregate economic activity and investment flows, tariffs are a significant tax on trade and investment, and one objective of trade agreements, both obvious and subtle, is provision of increased certainty for markets generally and for investors in particular. This effect emerges through the formal implementation of procedures for adjudicating trade disputes. Once the objectives of the tariff hammer multiply, it is obvious that much less certainty will be the result, as the formal adjudication procedures are not designed to deal with them, and resolution of such non-trade disputes as immigration pressures inevitably will be ad hoc.
This newest evolution of the Trump tariff threat is particularly perverse in the context of U.S.-Mexico energy markets because of the capital intensiveness of the sector. That an agreement has been reached is beside the point: The threat can be made repeatedly as inevitable U.S.-Mexico frictions and disagreements emerge over time. Gulf coast refineries use substantial amounts of heavy Mexican crude oil; a tariff would disrupt those operations, destroying part of the economic value of the refinery investments, and thus reducing future investment incentives. (Almost 10 percent of U.S. crude-oil imports are from Mexico.) Pipeline investments will suffer from the same problem, and the same is true for drilling, wellhead, and other equipment obtained from Mexico. Can there be any doubt that Mexican retaliation would follow, adversely affecting U.S. oil and gas exports to our southern neighbor? The U.S. exports over 1 million barrels per day of petroleum to Mexico, and 70 percent of U.S. natural gas exports are by pipeline, and two-thirds of that are to Mexico.
The “success” claims now being made for the recent Trump tariff threat directed at Mexico ignore this Pandora’s Box of future adverse effects attendant upon increased uncertainty. There is available a solution to this new problem: A renewed effort to complete and implement the U.S.-Mexico-Canada free trade agreement (USMCA), as a replacement for the NAFTA agreement that now is 25 years old. To a significant degree, USMCA will impose constraints upon the use of tariffs as a tool in pursuit of innumerable policy goals largely independent of trade parameters. Accordingly, USMCA will restore investment incentives and undo much of the hidden damage caused by the Trump policy.
