Mexico and China figured prominently in the new US president Donald Trump’s election campaign. Mexico was singled out for taking away manufacturing jobs from the US. Trump also identified Mexico as one of the largest sources of illegal immigrants into the US. China, apart from being labelled a currency manipulator, was blamed for severely damaging the US economy by running a huge trade surplus and dumping cheap imports into the American economy.
The slant of Trump’s electoral campaign generated apprehensions that under his presidency, the US would follow distinct anti-Mexico and anti-China policies. With Trump about to move into office in a few days, there are signals of the fears coming true.
Mexico has been a major beneficiary of the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico enacted in 1993. Several US companies, particularly automakers, have relocated parts of production to Mexico for utilising cheap labour and lower material costs. These companies take advantage of zero tariffs under NAFTA to export cheaper cars made in Mexico to the US. While US consumers benefit by getting access to cheaper automobiles, shelving of domestic operations of many US auto companies have led to loss of American jobs. Trump’s goal is to retain American jobs. He has argued for renegotiating NAFTA and imposing a border tax as high as 35%, making exports from Mexico to the US expensive and discouraging US producers from relocating to Mexico.
Business reactions appear to indicate that Trump’s threat of American companies facing ‘consequences’ for shifting jobs out of the US is working. The Carrier was among the first to announce retention of around 800 jobs in the US that were slated to move to Mexico. Ford has recently decided to scrap plans for building a new facility at Mexico and has instead planned to add more jobs in its Michigan operations in the US. The largest American automobile company, General Motors, has been at the receiving end of Trump’s attention for shifting production and jobs to Mexico. Several US companies with plans for expanding business in Mexico have put them on hold and decided to ‘wait and watch’.
Observers are also detecting signals on Trump’s strategy towards China. This is particularly with respect to US-China trade relations where Trump is determined to correct the imbalance and reduce America’s dependence on Chinese products. The appointment of Peter Navarro, author of Death by China and The Coming China Wars, as head of the White House National Trade Council, complements appointments of Robert Lighthizer as USTR and Wilbur Ross as commerce secretary. All three are known for their critical views on China. Trump’s much discussed telephone conversation with Taiwanese president Tsai Ing-Wen soon after assuming office—the first between the Taiwanese and US presidents since 1979—did not fail to send the message to China. President Tsai is opposed to the ‘One China Policy’ and is a supporter of stronger US-Taiwan ties. If these developments are any indication then Trump is likely to assume aggressive postures against China on both trade and strategic fronts.
The specifics of Trump’s policies towards Mexico and China will become clearer once he and his team are in place. But early indications as mentioned above point to introduction of policies that reflect Trump’s views on jobs and trade articulated during his high-pitch election campaign. The implications of these policies will be significant.
A border tax on exports to US from Mexico would cripple one of the world’s most active and economic activity-inducing FTAs. The NAFTA has worked well for its members. It has also worked well for countries entering into bilateral FTAs with NAFTA members such as the US or Canada. Access to either of the latter markets provides FTA partners additional access to most of the consolidated North American market, as exports originating from NAFTA members move tariff-free within the common market. This would have been an external benefit for Indian exporters under the India-Canada FTA being negotiated. A border tax would change all these. It would also work opposite to the key rationale of FTAs. Countries enter into FTAs for eliminating tariffs and lowering cost of trade. A border tax and withdrawal of incentives for producing and exporting from FTA partner countries makes cross-border trade an expensive proposition.
Trump might resort to similar trade actions against China. High tariffs on Chinese exports to the US would affect Sino-US trade, as China is likely to retaliate. Initiating measures for establishing China a currency manipulator would complicate global financial transactions given the yuan’s acceptance as a global currency. From a larger global trade liberalisation perspective, the actions would militate against the agenda and principle of the WTO, which has been striving for years to move towards a tariff-free world.
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Trump’s views on trade as an unfair and discriminatory economic process are well known. If these get spelt out in specific actions, the effects on global trade would be significant. Coercing US companies to not go out and ‘Make in America’ would require significant changes in domestic tax structures for offsetting higher costs of producing from home. That again might have implications for revenues and Trump’s grand infrastructure investment plans. The long-term impact of these policies for the US economy therefore is uncertain. But like in the US elections, Trump might end up producing surprises and doing for the US what most don’t bargain for. ‘Watch’ would reveal this once ‘wait’ ends on January 20.
The author is senior research fellow and programme lead (trade and economics) at the Institute of South Asian Studies in the National University of Singapore. E-mail: firstname.lastname@example.org Twitter: @Amitendu1. Views are personal