CFR Senior Fellows discuss the economic and political ramifications of President Donald J. Trump’s announcement to enact tariffs on all Mexican goods unless they do more to curb border crossings into the United States.
Bernard L. Schwartz Senior Fellow
Vice President, Deputy Director of Studies, and Nelson and David Rockefeller Senior Fellow for Latin America Studies
MCMAHON: Well, thank you, Operator. And good morning and welcome to this Council on Foreign Relations conference call.
I am CFR.org managing editor, Robert McMahon, and as headlined, we are here to talk with CFR Senior Fellows Shannon O’Neil and Ted Alden about President Trump’s warning about U.S. imposing tariffs on Mexico unless it takes steps to curb border crossings into the U.S. I also want to note that Ted Alden is the Ross Distinguished Visiting Professor at Western Washington University.
The president reinforced his threat just moments ago, and we’re going to be getting into what that means, what’s at stake, and a cross-section of discussions about tariffs and the migration issue.
I’d like to remind the audience that this call is on the record. I’m going to start things off with some questions for Shannon and Ted, which should take about fifteen to twenty minutes or so, and then we’re going to open up questions on the call for you.
Ted, I’d like to kick off with you. In a recent blog post you urged Congress to exercise its authority to block the president’s action announced last week or, in your words, “he will be free to slap tariffs on any country or any product at any time for whatever reason he dreams up.” Now the Washington Post is reporting that Republican lawmakers appears to be on the verge of taking some sort of action.
Can you sum up what’s going on, what’s at stake in this?
ALDEN: Yeah, thanks very much, Bob, and great to be here with you and Shannon.
I think this is a qualitatively different action from anything Trump has done on trade up to this moment, and not just because he is linking it to immigration issues, which we can talk about. But if you just look at the trade piece, everything the president has done up to this point has some sort of clear statutory authority—the Section 201 of the Trade Act of ’74 which was the basis for the tariffs on washing machines and solar panels early on in his administration. You look at Section 232 of the Trade Act of 1962 which was the basis for the steel and aluminum tariffs. I had quibbles with the way that analysis was done—and a lot of people did—but there was, again, a clear legal basis, a grant of authority from Congress. The Section 301 actions against China, both again clear, statutory authority, a lot of support in the Congress for getting tougher on China over what is seen as unfair trade practices out of—out of China and, you know, everything that has been done so far there, again pretty clearly within the president’s authority under a delegation of tariff power by Congress. Again, you can be upset about the fact that they did an end run around the WTO—I am—but statutorily I think the president was fine.
This is very different. The action against Mexico, first, is in effect an undermining of the trade agreement—the U.S.-Mexico-Canada agreement that the president concluded with Mexico and Canada, so he is very quickly turning his back on an agreement that his administration concluded. But if you look statutorily, the authority he is citing—the International Economic Emergency Powers Act of 1977 has never been used in this way before. It has been used against countries that are seen in one way or another as hostile to the United States—you know, Iran, or Iraq, or Somalia, or Libya—never been used against a close ally like Mexico, never been used against a free trade partner, and it has never been used to levy tariffs on imports. The sanctions have been in the form of, you know, restrictions on access to the banking and payment system, sometimes seizure of foreign-owned property here in the United States, blocking of assets in various ways. It always was—people have speculated that it could be used for tariffs at some point but had never been used this way before, and pretty clearly was never intended by the Congress to be used this way.
And so what I was pointing out in the blog post is if Congress allows the president to do this, then there really is no reason he can’t declare an emergency almost any time he wishes and use tariffs either on selected countries or selected products. So that would be the—really the complete abnegation of Congress’ constitutional power over foreign commerce and tariff setting. So I think that’s why you’re finally starting to see at least the rumblings of some kind of serious action from the Republicans in Congress.
MCMAHON: So Ted, what kind of actions—just to follow up—would Congress be able to take? What are some of the things we should be looking for in terms of Congress stepping in and actually stopping the president’s ability to initiate what would be a round of tariffs up to 25 percent?
ALDEN: I mean, I think the most likely would be—under IEEPA there is a provision—it was initially a concurrent resolution; after a court (ruling it ?) now requires a joint resolution. But there can be a joint resolution by Congress to overturn the declared state of emergency, and so that would have the effect not only of blocking these tariffs, it would also block the authority that Trump has been using to repurpose money from the Pentagon for building his wall on the southern border.
So that would be a pretty strong action that would go right at the heart of the president’s policies on the border and on trade. But that is the procedure envisioned under IEEPA. That’s probably the most likely one.
A second possibility is Senator Pat Toomey’s legislation that would require congressional approval of any tariffs imposed on national security grounds, so that would cover not just actions under IEEPA like this one, but also the Section 232. That was something that Senator Toomey began working on after the steel and aluminum tariffs.
You could imagine other options. For instance, you could amend IEEPA to state clearly that it could not be used against U.S. free trade agreement partners. So I think all these things are possible. They will, however—assuming the president would veto such legislation—require a two-thirds majority in both houses.
MCMAHON: Right. And to this point, we haven’t seen the Republican Party traditionally that had been more—had more free trade advocates willing to maybe take that step, especially if it is involving the border funding. But potentially, as you say, there are some stirrings that this might be a call to action.
ALDEN: Yeah, you know, famous last words, but I think this time could be different. I actually think that this is such a frontal assault, not just on Congress’ constitutional power, but really on what has been a, you know, core of Republican ideology for decades now, which is a belief in free trade and low taxes. I mean, I think the other thing that is really sinking in up on the Hill is, as these tariffs rise—and you look at the tariffs on China and on Mexico, the steel and aluminum tariffs that are still in place—I mean, at this point they are going to wipe out for, you know, sort of middle-class and lower earners all of the benefits of the 2017 tax cut. As it creeps up, the impact will be still more significant.
I also think there is worry in the party about what it does to the economy. Clearly, having a strong economy going into 2020 is vital for the Republican Party, who are now having discussions about maybe the Fed is going to have to cut interest rates because the uncertainty caused by the president may drive the economy into recession, so a lot of reasons I think for the Republicans to be worried right now.
MCMAHON: Yeah, and then as we’ve seen stock market people as well.
I want to come back to both you and Shannon to talk about some particulars about the impact on Mexican goods being taxed in the way you mentioned. First, I want to ask Shannon, though, from the Mexican side of the border, we’ve got a delegation now in Washington. I think talks are supposed to start tomorrow—on the Mexican side led by Foreign Minister Marcelo Ebrard and on the U.S. side by Secretary of State Pompeo.
Shannon, can you talk a little bit about what you got into in your new piece for Bloomberg, which is about Mexico’s capacity to do anything about the migrant flows, for one thing, but also other ways they can kind of work out of this bit of a mess that has developed.
O’NEIL: Well, this was—thanks, nice to be with all of you here today—but this was a huge shock for the Mexicans. It came, as they say, out of left field. But they had not expected this. They thought that they had gotten through the worst with the United States with the renegotiation of NAFTA, with the new USMCA. And in fact, the day that this was announced, they were sending it to their Congress to begin debate for ratification of the new trade agreement. So they were really scrambling at the end of last week just to figure out why this is happening.
And, you know, the real question here is Trump has said that he wants Mexico to stop all of the immigrants coming up from Central America as well as stop the flow of drugs—he has added that to the mix in the subsequent tweets and things that he has come out with. And the challenge for Mexico, frankly, is that they don’t have the capacity to do this. I mean, this is a problem that the United States admits that they can’t deal with, and they expect Mexico, a country with fewer resources and a much less capable bureaucracy, to do that work for them.
What we have seen with Mexico over the last couple of years, under the previous administration, the Pena Nieto administration, and now in the first six months of the López Obrador administration, is we have seen Mexico step up to deter and to deport Central Americans back to their country.
And so López Obrador, he, during the campaign, was much more open to migrants, said he wasn’t going to do what the previous government had done, which was stop many of those from Central America, from Guatemala, El Salvador, and Honduras, where they’re primarily coming from. He said he was going to open it up more.
In fact, when he first came into office, he gave a new humanitarian visa where these people could stay in Mexico under this new visa. And that was quickly shut down after a couple of weeks because so many people had applied. They had over almost fifteen thousand applications just in two weeks. And so they stopped that. And they really went back to what the Pena administration had been doing, so deterring migrants from coming across the border and then, when they came across, stopping many of them, as well as sending tens of thousands back.
And so, so far this year, the AMLO administration has sent back over fifty thousand Central Americans to their countries. So that’s fifty thousand that have not made it up to the U.S. border. And those have particularly picked up in the last couple of months, after we saw Trump actually in the end of March, beginning of April, threaten to close the Mexican border because of the migration that was coming north. And so Mexico, in response, stepped up the deportations back in the south of Mexico.
We’ve also started to see in the south of Mexico, which is where Trump and others have focused their ire on Mexico, we’ve seen them raiding hotels, raiding refugee center, raiding others, to round up these Mexican—or, sorry, Central Americans that are coming up through Mexico. So there really has been a stepped-up effort to try to comply with Trump’s demands in the past couple of months. But it seems that that hasn’t been enough. And so here we are with this threat of looming tariffs starting next week.
MCMAHON: The U.S. government has been pressing Mexico to sign what’s called a safe third-party agreement that would—could be something that they could—that could then lead to the lifting of this tariff threat.
Shannon, could you talk a little bit about what that means and whether that’s something we might see discussed in the meetings that get under way tomorrow?
O’NEIL: Sure. So the safe third-party agreement, the idea here is that the United States and Mexico, they would recognize Mexico as a safe place. In fact, Canada has one of these with the United States. It’s a safe place for migrants to come if that country can meet all of the rights and responsibilities of those refugees.
And what it would mean is that any migrant who’s claiming asylum, claiming refugee status, who comes into that country, they have to ask for asylum or refugee status in that country. They can’t keep coming to another country and then ask for it there.
So what this would do—the United States and the Trump administration wants this because any Central American that touches Mexico first would have to appeal to Mexico. They would have no rights to appeal to the United States. And then the United States would be free of any obligations or need to process those people and go through our own asylum process here. So this would be a big benefit in Trump’s mind and to the United States, because they would just wash their hands of most of these Central American migrants, at least those that come up through Mexico to the southern border, which are many of them, most of them.
But it would leave Mexico in, in my view, an even bigger quandary, because they would be responsible for all of these people. And this is a country whose immigration authorities—they have two main bodies, the National Immigration Institute, which handles all of immigration, and then they have a separate body that deals with asylum cases. These are some of the weakest bureaucracies within the total—within the Mexican state.
And so, for instance, the asylum body is called COMAR. They had thirty thousand applications last year and they were barely able to process a quarter of them. And this year they’re set to have—double that number, almost sixty thousand coming through, with fewer resources. They’ve appealed to the U.N., and the U.N. is actually going to give them a couple of million dollars to open up a new office in Tijuana, so along the border with the United States, because of the crush of Central Americans that are up there. But this is a bureaucracy that’s overwhelmed.
So if Mexico signed this agreement, one, Mexico is not a safe country for migrants. So the high bar that these types of agreements are supposedly set would not be passed. But if they did agree, then Mexico would be on the hook to deal with all of these migrants with a much limited—much more limited capacity and set of resources than Trump or than the United States has.
MCMAHON: And Shannon, you mentioned in your Bloomberg piece that, as a corollary, Europe provided Niger, a very poor country in Africa, with more than a billion dollars to stop Libyans from transiting across its territory. And you said maybe potentially Washington could step up with some money for Mexico to do the same. Is that something that is feasible at this point?
O’NEIL: Well, that’s something that might be feasible. And if Mexico was negotiating this kind of agreement, one would expect them to ask for it, ask for support to take on this big challenge. But it’s not something that I see coming out of Washington today. What we’ve seen so far is Trump saying that he would put tariffs on, that he would hurt Mexico’s economy and its industry and jobs and all of that, if they don’t do something. But it seems much more sticks than carrots; doesn’t seem as if the administration is offering an increase of aid or support for this.
And interestingly, we’ve seen a decade-long set of security assistance, much of that that’s gone to migration as well as others fighting drug cartels and organized crime more generally, that began a decade ago called the Merida Initiative. So this has been really the basis and foundation of U.S.-Mexico security cooperation for a long time now.
And the Trump administration over the last couple of years has cut back what it’s asking Congress for to give to Mexico, even though that money has moved over time from providing hardware and focusing on drug trafficking to, more and more, fixing rule of law and also addressing migrants and addressing the Mexican southern border. So far Trump has been pulling out of providing Mexico those resources.
And then also we saw in March Trump announce that he was ending all aid to Central America, where these migrants are coming from. So if that’s the precedent, it’s hard to imagine that the United States and the Trump administration would be willing to offer Mexico, you know, upwards of a billion dollars to deal with this problem on its own territory.
MCMAHON: Shannon, you mentioned economic pain. I wanted you first and then Ted to talk a bit about both sides of the border, and probably beyond, what sort of impact if the U.S. goes through with the tariffs starting next week, what sort of impact this is going to have on companies ranging from, I guess, avocado growers to auto manufacturers and so forth. So could you talk a little bit first, Shannon, and then Ted, about the economic pain?
O’NEIL: Sure. Well, the short answer is there will be economic pain.
O’NEIL: Most of it will be from Mexico. Mexico is one of the—has become one of the most open countries in the world. Trade to GDP is somewhere in the range of 38 percent trade to GDP. So that’s more open than China. That’s more open than most countries around the world. And the vast majority, 80-plus percent, of that trade goes to the United States.
So effectively you’re talking, you know, $300-plus billion, $350 billion, that’s going to be first sanctioned if Trump follows through of 5 percent, and then ratcheting up to up to 25 percent by October. And it is a whole range of goods. These are farms. These are factories. They cover the country, though a lot of it is in the center, to the north of the country.
I mean, one interesting issue in Mexico, and one of the reasons why López Obrador won the election last year, is that the south of the country has remained very isolated and economically stagnant. But when you look at the prosperous part of the economy, when you look at the dynamic part of the economy in Mexico, it is tied to the United States and tied to trade with the United States.
So this will definitely be a hit on the Mexican economy. We saw in the first quarter of this year Mexico’s economy already tipped into recession, be down slightly. And so imagine that will continue and just get worse.
MCMAHON: So raising the prospects not just Central Americans may be coming north in search of better economic welfare, but also Mexicans.
O’NEIL: Right. And that’s the counterproductive side of this. You have study after study that shows when Mexico’s economy weakens, when there’s fewer jobs there, few opportunities, Mexicans come north. And that really was one of the driving factors in the late ’90s, the early 2000s, when you saw record-high numbers of Mexicans coming to the United States. Part of it was a demographic bubble. There were lots of people turning eighteen years old and needing jobs and not finding them in Mexico. But a big part of it was economic stagnation, indeed crisis, in the 1990s in Mexico that led to this push of people to come north.
So, yes, if Mexico goes into recession—which, if these tariffs go forward, I believe it will—if you ended up even in a full-blown, you know, financial crisis or economic crisis, expect Mexicans to join the queue of Central Americans coming up to the United States. They wouldn’t be coming under asylum claims, but they would—or not many of them would be—but they also—but they would be coming here to work.
And the last thing I want to just throw out there is, you know, an argument is, well, the López Obrador administration should put many more resources behind stopping these migrants and, indeed, the budget that came out last December when the new president came in have cut the budgets of the Migration Institute. So that should be reinstated and could be increased.
But we also need to remember Mexico is right now stagnant. It’s now tipping into recession, so there’s not a lot of resources to go around, and it’s also facing record-high homicide and other crime rates. So when you think about security resources that are there to spend, yes, migration is an issue, but Mexico has this other domestic issue and needs to put money behind making the streets safe for Mexicans as well.
So there’s a real challenge here for the López Obrador government on where to allocate these resources.
MCMAHON: Thanks, Shannon.
And, Ted, from your part then, you know, the president mentions the term tariff and he likes to mention that it’s another country paying it. China is paying it. Mexico is paying it. But, obviously, it’s a tax that’s passed on to users, to importers, and so forth. Could you talk a bit about that side of this and the impact that you’ve seen, both from China but also anticipate with Mexico?
ALDEN: Yeah, let me—let me—let me first make one just kind of broader business-related point. I think—the other reason I think this action has been particularly shocking is that business so far has seemed reasonably confident that it could adapt to the new trade environment under President Trump. I mean, if you look at businesses historically, their first instinct is to adapt rather than fight, particularly if the president is a Republican because he’s giving them a lot of things that they want on lower corporate taxes and deregulation.
So companies, for instance, in the trade war with China they have been relocating, where possible, production to places like Vietnam and to Mexico. Mexico has been a favored destination now for investment because its wages are still reasonably low. It’s a—it’s a secure business environment and business had assumed, you know, we’ve got this new agreement with the United States so no need to worry about tariffs on exports from Mexico to the United States.
Well, boom, overnight that certainty is gone. So you now have companies looking out at the world and saying, well, if we can’t do business in China, we can’t do business in Mexico, are there other safe places to locate—do we really have to do what the president says and bring everything back to the United States and what are the costs of that going to be.
So this action from a kind of global supply chains perspective has introduced, I think, vastly more uncertainty than anything else the president has done up to this point.
Bringing it back to the domestic front, there has been a lot of discussion about this. Of course, we all know tariffs are not paid by foreign countries. They’re paid by Americans through consumer prices. There’s a—there’s a bit of a gray area there.
Depending on the tariff sometimes the foreign supplier will eat that in lost profit to try to keep their prices down. Sometimes the importer here in the United States or the retailer will absorb that cost in lost profit. But particularly as tariffs go up as we move from 5 (percent) to 10 (percent) to 25 (percent), or in China’s case we’ve moved from 10 (percent) to 25 (percent), those tariffs are too high for the companies to absorb and so those costs are going to be passed on to consumers.
There have been estimates that the average family paid about $430 for additional tariff costs—is paying that this year. Next year that’s expected to at least double. As I said, the costs to the average family are more than offsetting the additional cash they had in their pockets as a result of the 2017 tax cut.
So the more this trade war continues, not just with Mexico but other countries, the more consumers are going to feel it in their wallets and the more it will—it will hold down standards of living here in the United States.
MCMAHON: Great. Thanks, Ted, and thanks, Shannon.
I think that’s a very good point for us to now open up the floor for questions. I just want to remind all participants that this call is on the record.
Operator, can you please give instructions for asking a question?
OPERATOR: Absolutely, sir.
(Gives queuing instructions.)
We are currently holding for the question.
MCMAHON: And now, while participants are queuing up, I’ll pick things up also with another question.
So, Ted, I think in your response, both the one you just made and earlier, your reference was to sort of we’re in kind of a new place now with the way trade policy is being conducted. Can you talk a little bit about what precedent exists at all for a president to be conducting trade in this way and, beyond any sort of congressional action, what are sort of—what any other limits might be taking place, what impact that it might have on U.S. being able to conduct itself as a reliable trade partner?
ALDEN: It’s hard to find good historical analogies here because, of course, you go back to the 1930s when Congress first began delegating its trade authority to presidents the idea was that presidents were less likely to be protectionists. I mean, this sort of move to hand trade authority to the president began in 1934 and that was in the wake of the Smoot-Hawley tariffs when it was, of course, Congress which, you know, tariff line by tariff line, raised taxes on imports to the United States and other countries responded in kind with negative impacts to our economy and other economies.
So now, you know, we find ourselves in a situation where we have a president who’s been granted vast authority by the Congress basically over the last seventy-five years and is using them in ways that I don’t think any of us, certainly not the members of Congress who delegated that authority over the decades, had anticipated.
I think the default assumption—actually, here, let me put this in another way. I think one of the reasons that President Trump has had so much running room is that the Congress and the business community has not been clear whether he’s Ronald Reagan or Herbert Hoover.
And what I mean by that is Reagan was willing to use tariffs and other trade sanctions to try to force foreign markets to open up, particularly focused on the Japanese, and I think there are quite a few members of Congress who have been willing to give President Trump the benefit of the doubt. You know, tough tactics are needed to go after the Chinese, to, you know, open the Japanese market, to stop European practices that we dislike.
And so the purpose here is to expand trade. But, increasingly, I think it’s becoming clear that the president just likes tariffs. In that sense, he’s much more Herbert Hoover than he is Ronald Reagan. And I think as that really sinks in, I think the reaction from business and from Congress is going to be different because having a president who is a genuine protectionist as opposed to someone willing to use protectionist tools for free trade ends, that’s a very different sort of calculation.
MCMAHON: All right. Thank you.
Operator, do you have any questions lining up in the queue, please?
OPERATOR: Yes. We have a question from Kenneth Oye, MIT.
Q: Ken Oye from MIT. I’m actually calling from Lausanne, Switzerland.
If Trump imposes tariffs on Mexico, what are Mexico’s options? They can, certainly, impose countervailing duties but that would be mutually destructive. So challenges to multilateral institutions like the WTO or the remnants of the NAFTA would appear likely.
The questions here is how would you see the panels or the appellate bodies ruling when Mexico presents this case. This is not a classic invocation of IEEPA for classic security like grounds. It’s not release of the Iranian hostages. It’s also not a Section 301 case of the sort that we’ve seen a lot of. So what does WTO case law show in this area if, or I should say when, Mexico responds to imposition of tariffs by going to Geneva?
MCMAHON: Ted, do you want to kick off with that, a trade settlement?
ALDEN: Well, maybe Shannon—let Shannon take the first part of what Mexico’s response options here and then I’ll tackle that—
O’NEIL: Yes, I’ll talk about their options and then I’ll let you—I’ll let you talk to the—
MCMAHON: Talk about the options and then Ted talk about WTO, yeah.
O’NEIL: Yeah. So, you know, Mexico has—had past—we’ve seen what Mexico has done in the past when they’ve put tariffs on. So we had back several years ago a trucking dispute within NAFTA. The United States was supposed to let Mexican trucks come in and the United States did not for many years.
They went through a whole process through NAFTA arbitration, and when they kept winning they finally decided to put tariffs on the United States—retaliatory tariffs. And then we saw Mexico respond to the steel and aluminum tariffs that were put on under the section that Ted was talking about in 232, and there they responded, too. And what they’ve done in both of those cases has been targeted retaliatory tariffs, and what’s quite interesting there is they come up with a pretty sophisticated list of places that they put tariffs on that are not as linked to their own competitiveness or supply chains.
So, for instance, in the steel and aluminum cases, they did not put tariffs on steel and aluminum and, in fact, the United States has a surplus of steel with Mexico. So it sends more steel to Mexico than Mexico sends to the United States. Instead, they targeted mostly agricultural products. They targeted pork and soybeans and corn. They targeted bourbon from Mitch McConnell’s district.
They went about them—were pretty sophisticated both in the kinds of products—usually final goods that would head to Mexico, often agricultural—as well as the districts, so targeting particularly Republican districts—the products that come out of there. And, you know, there Mexico has—they have a list. They’re very capable and I think they could do that again, and this time rather than being a couple billion dollars—a little less than a couple billion dollars—they’re going to have somewhere between 15 (billion dollars) and $20 billion to work with starting next week that they could tax. And if you look at the main exporting states to Mexico, many of them are swing states. So parts of it are the auto states, they’re Illinois, Michigan. Arizona is a big one. Texas imports $100 billion a year from Mexico, so a big part of what comes in comes in through Texas.
So I think they could be pretty strategic there about putting retaliatory tariffs on that wouldn’t necessarily hit their auto industry. I mean, the U.S. tariffs would hit it, but they wouldn’t double down on that. They would go after other kinds of products. But that could put Texas into recession, Iowa, other Midwest farming states in the leadup to 2020. So that’s one option. That could be something that they could—and they don’t have to put the whole amount. They could—they could start putting on—as the Chinese have now done—you could start putting on particular amounts and going after particular industries there.
If they decide to the WTO, that’s another option they have. And I’ll turn to Ted to talk about how that might play out.
ALDEN: Yeah, so, thanks, Shannon. I mean, just quickly on that. I am not a WTO lawyer, but there are cases that have already been adjudicated, and others coming before the WTO, having to do with this question of the scope of the national security exception. There was a ruling in a case involving Russia and the Ukraine. And the short versions is, the essential question is, is the national security exception self-judging—i.e., if the U.S., or Russia or any other country says we’re facing an emergency, will the WTO play any kind of role in assessing that claim and deciding whether the economic restrictions were warranted under the WTO’s national security exception? In the Russia case, the panel said it did have some right to review the nature of that claim, even though it ultimately mostly sided with Russia. We will see how this plays out. There are a whole series of cases against the U.S. Section 232 action on steel and aluminum.
I would make the broader point, though, that, look, if we’re being honest with ourselves what the WTO does or doesn’t do in these cases is irrelevant. First off, if things continue the way they are there isn’t going to be an appellate body at the end of the year. The chairman of the appellate body said last week that he believes that this dispute with the United States is unlikely to be resolved, in which case the appellate body will fall below quorum in December and will be unable to rule on cases going forward. The Trump administration has shown nothing but an instrumental interest in the WTO. It’s happy to wave the WTO flag when the WTO rules in the U.S. favor, say on the Airbus case, but otherwise is quite willing to ignore the WTO and its dispute procedures. So I think the WTO, unfortunately, is not going to be a player in resolving this issue.
Q: But it’s time for business to actually rally around this issue when you look broadly and over the long term.
ALDEN: I would agree. I think the uncertainty costs of losing the WTO dispute system are very substantial. And I’m puzzled as to why business hasn’t woken up to that already.
MCMAHON: Thank you. Operator, do we have another question, please?
OPERATOR: Yes, sir. Our next question comes from John Rogers, United States Courts of Appeals.
Q: Yes. Thank you for your presentation.
I wonder if—in reading your blog, Mr. Alden, and you talk today comes close to saying that this is a violation of IEEPA, says it’s an abuse. Is it illegal? If it is illegal, then what—would you anticipate suits in American courts to stop it? Or is it not illegal, but just highly ill-advised?
ALDEN: Well, I do—there will be suits in American courts to stop it. I think, you know, the Chamber of Commerce is working on an action. I think business groups will file in American courts to try to claim that this is, in fact, a violation of IEEPA. I mean, you may know the case law on this better than I do. You know, every time—every time we talk about this, the sort of default position is that the courts have historically been very reluctant to second-guess a president’s declaration of national emergency. And if you accept the president’s declaration of national emergency in this case, there are certainly ways to read IEEPA such that it could permit actions like the tariffs. I mean, IEEPA’s a very, very broad statute which gives the president virtually unconstrained authority to use economic sanctions of different sorts to deal with national emergency-related problems.
And this has never been done under IEEPA before, but I would certainly not be an unreasonable reading. And you can be certain the president’s lawyers would make the argument that there’s nothing in IEEPA that prohibits the president from doing this. So I do believe it’s an abuse. It’s certainly not what Congress intended. But I can’t say I’m confident that a court would rule against the president if this case were to move forward in U.S. courts.
Q: Thank you.
MCMAHON: Thank you for that question.
Operator, do we have another question, please?
OPERATOR: Yes, sir. Our next question comes from Mario Calvo Clatero (ph) from Las Campeles (ph).
Q: Yes. Thank you.
I have a sort of a technical question to understand what the practical impact on business would be. For example, if the tariffs would be applied to the whole value of the goods exported or just to the value-added produced in Mexico, because that will make a huge difference from an amount viewpoint. You know, if the Mexican plant imports from China, then there is, like, a double taxation. So is it net or it isn’t? And then software from Mexico are all based on the value-added formula. So it would be very difficult for many companies to adopt by June 10 for tariffs that would be based on the whole value of the goods. So how do you see this evolving?
MCMAHON: Shannon or Ted, you want to start out with the—sort of the logistics of the tariff?
ALDEN: My understanding, and I’m prefacing everything by saying I’m not something, I’m not a—I’m not a customs lawyer. But my understanding is that the tariff is applied on the imported value of the goods. So whatever the importer is paying when the good enters the United States. So that’s not the retail value; it’s the imported value. The retail value would be higher. But it’s not calculated on a value-added basis. It would not just be a tariff charge on whatever portion of the value is added in Mexico.
And I think that’s one of the problems with this sort of tariff, because you look—and Shannon can talk a little more about this—I think you look at, for instance, the auto sector. You have part and components often moving across the border a number of times before the vehicle is finished. So you could actually end up in a situation where that tariff gets charged multiple times on products moving back and forth prior to final assembly. So I think the impact will be much more significant than if it were just charged on the final product on the value added in Mexico.
If I got any of that wrong, Shannon, you know, otherwise please correct me. But I’m pretty sure that’s right.
O’NEIL: Yeah, no, that’s my understanding too. And actually talking with a couple people yesterday in Mexico, not only is it that you have to pay this tariff, this 5 percent of whatever it escalates to, but if you go back and forth across the border because you have plants on either side, or you’re bringing in materials from the United States and sending it back and bringing it back, then you may need to change the way you actually work with other types of plants, because you’d be paying those tariffs each time you cross the border. So you would add to it—not only is it not the net, it’s the gross. But that gross could be higher because of this double—this increasing taxation on each—on each step, at each crossing, is the way I understand it right now.
MCMAHON: Great. Thank you for that question.
Operator, do we have another question, please?
OPERATOR: Yes, sir. Our next question comes from Seema Mody from CNBC.
Q: Seema Mody from CNBC.
We’ve seen a growing number of U.S. companies try to decouple from China and shift manufacturing to Vietnam and other manufacturing hubs across Asia. I’m curious which countries we see potentially benefitting from this U.S.-Mexico trade conflict. Is it Vietnam or perhaps other Latin countries that have similar expertise in manufacturing auto components, among other goods? And if there are any companies that have taken a proactive role in finding those alternative destinations.
MCMAHON: Maybe Shannon could kick off. Or Ted.
ALDEN: If Shannon wants to kick off that’s fine. Yeah, Shannon can kick off here in the hemisphere, and I can talk a little bit about what I’ve seen going on in Asia.
MCMAHON: Yeah, that’s what I was going to say, yeah.
O’NEIL: You know, and what’s interesting, and Ted has already brought this up, is Mexico was starting to be seen as a safe haven from the tumult with China. As people were trying to leave China they’re going to Vietnam, they’re trying to find other places. But Mexico was seen as one of those, because they did have this free trade agreement. And how the question is: Where does one go from there?
In terms of the region, you know, you have—you have either countries where there’s no free trade agreements, you have most favored nation status. And those—there’ll be some benefits for some products but not for others. And in other ones you have agreements. So Central America has the Central American Free Trade Agreement. Peru also has a free-trade agreement with Colombia as well. But, you know, they’re not necessarily great hubs for things like autos.
And I think the real challenge here is do you move auto production totally outside of North America and you just import cars, sort of the whole car, from an Asian supply chain or a European one, or do you just cut the number of types of options available to the United States? And we’re already starting to see this, where, when you go to dealerships in the United States, Americans are buying fewer cars. They’re buying more pickups and SUVs and the like. So you just don’t have as many options in terms of car models as you would have had 10 years ago or before.
And particularly—or, you know, do you just raise the price, and then people buy fewer cars? And that hits factories on both sides of the border, because the fewer cars that are bought, people, you know, wait six more months or wait another year before they replace their car. That means just fewer coming off the assembly lines, which are often in the United States, frankly, because you have the end product closer to the consumer, the U.S. being the biggest of the three markets here in North America.
So you may just end up having fewer shifts or just shutting down of some of these plants, particularly in that industry. But, yes, you do see computing manufacturers, Dell and others, are starting to look at different places that they can move their supply chain and then import into the United States. But when they do that and when they come from places that are not Canada and not Mexico, the chances of almost any of that product being made in the United States is much, much less than if it was—than if something was coming in, an import was coming in, from our neighbors.
ALDEN: And the only thing I’ll add is I think it’s important—and I think you will see more of this in this conversation—to start specifying by industry. I mean, broadly, you know, Vietnam has been the big beneficiary so far if you look at the Vietnamese trade surplus with the United States rising. Malaysia has done quite well; Taiwan and a few others.
But I think it—what we will see is that it varies a lot by sector. So some sectors are pretty mobile. I mean, moving clothing production around or moving shoe production around is a pretty easy thing to do. But Shannon talked a lot about auto production. That’s not terribly mobile. You can’t just pick up and set the supply chain in a new place a month later. I mean, these are major long-term factory investments. I think in China the same is true with all of the infrastructure around smartphone manufacturing; you know, Apple’s production in China via Foxconn.
I think these things are much harder to move. And so I think we will see, in those sectors, much more of this being passed on to consumers, either in the form of higher prices or, as Shannon suggested, diminished choices in the retail market. So I think what we’re going to see going forward is a lot of researchers doing much more fine-grained analysis about what’s actually moving and what sectors of the economy are less mobile. And we’re just going to see the prices passed on to consumers.
MCMAHON: All right, thanks for that question; good point on the international ramifications.
Operator, do we have another question in the queue, please?
OPERATOR: Yes. Our next question comes from Stephania Ma from Xinhua News Agency.
Q: Hi. Thanks for the discussion.
I have a question about China’s stance on this escalation of trade wars with the U.S. We know that China has issued a white paper declaring its stance, its latest stance. And how do you predict that the paper will help shape the future path of, you know, U.S.-China trade negotiations, as some say that the paper sends signals that China is willing or is pressuring the U.S. to effective negotiations?
Just another follow-up question is about Trump’s policy of maximum pressure to win gains using tariffs, especially in the political arena, as we saw in the Mexico case. So that’s two sides of one question. So thank you very much.
MCMAHON: Let me give the first question to Ted. Did you want to—
ALDEN: Yeah, I—no, I did. I got the—let me respond quickly. And I actually think there’s a broader point that we can both talk about. I mean, I think, with respect to China, I don’t think the white paper is going to change anything. I think if you looked at USTR’s response yesterday, it was basically we don’t believe what China’s saying in its white paper. The U.S. position is that China was moving in a positive direction and then backed away.
I mean, I’m afraid the U.S.-China talks are very much stalled at the moment. And I don’t exactly see what’s going to free them up. Possibly when the G-20 convenes in Osaka later this month and the presidents of the U.S. and China meet, maybe something will happen to get the negotiations restarted. But at the moment both sides look very deeply dug in.
I think—the second question is very interesting, because I think there is—there’s a real question here about how hard the United States can push its trading partners and at what point that backfires. I mean, Trump’s theory is that threatening tariffs and imposing tariffs produces leverage that you can then use to get a better agreement. That’s been tested out with China, and at the moment the talks are completely stalled. He’s done some of the same with Japan. There’s nothing to show for it yet. We’re seeing this now with Mexico.
I think it’s fascinating with, you know, Mexico and Japan. Both countries that I think very much want to have good relations with the United States are doing everything they can do to try to appease the president, and yet still are finding themselves without anything positive to show for it.
I mean, Shannon, do the Mexicans reach a limit at some point where they stop playing so nicely? Certainly the Chinese appear to have reached that limit.
O’NEIL: You know, I think that is the big question. And Andres López Obrador, the current president, has been appeasing Trump much more than people expected him to do at first. And, you know, he wrote a book in his campaign called Listen Up, Trump that was sort of, you know, I’m going to be strong and tough against the United States. And he’s been anything but since he came in. He’s been appeasing him on the trade issues, now on migration issues. In the lead-up to these tweets he had really done whatever—what Trump had wanted, really tried to work with people.
But there is this question of when does it get to a point where he has to stop. And there’s a few things there. One is, Mexican public opinion—their opinion of Trump is incredibly low. This is their least-favorite U.S. president in—you know, since recorded polls. Now, they’re not the only country around the world that feels that way, but they feel very strongly about that. So it’s not particularly popular politically to acquiesce to Trump.
And also, as some of the things that Trump is doing begin to affect them, in particular these tariffs come in, and Mexico goes into recession, and you see the loss of jobs and the like, it will become less and less popular to not do something, because by not doing anything, but immediately acquiescing, I think Mexico, frankly, loses its leverage with the United States, because Mexico—look, Mexico will be hit harder than the United States, but Mexico does have some areas of leverage. It has retaliatory tariffs on the trade side, and it also has the ability to not stop those fifty thousand migrants that were coming in. It has the ability to sort of put up its hands and claim that it can’t do anything about the humanitarian crisis that’s happening to its south and that’s causing the flow of migrants coming up from Central America.
So I would imagine right now Mexico is being very conciliatory in the press. They’re—you know, AMLO has been saying he’ll do everything he can or he’ll do—take further steps with the migration and the like. But there is a time in the back rooms, when they’re meeting with the various players in the United States, that they could lay out, one, their limits—they just can’t do much more, they don’t have the capacity; and two, that they also have some tools to hit the United States and to hurt the United States. And particularly as they go into 2020, as we look forward toward elections and the like, a lot of the pain that could happen on the economic side would be targeted to swing states and to states that Trump barely won last time around.
Q: OK, thank you very much.
MCMAHON: Thanks for the question.
Operator, another question, please?
OPERATOR: Our next question comes from Jeffrey Shafer, Insight.
Q: Yes. I’m an economist. But my first reaction, when this policy was tweeted, was not to think about a tax on business or workers and so forth, but to think isn’t this extortion to get Mexico to violate fundamental human rights? I went and checked the Universal Declaration of Human Rights, and it is very explicit that there is an absolute right to leave a country, and it’s a right that’s extended both to citizens and to others in that country.
Does this—I’m amazed that I haven’t seen any discussion of this. Does this matter at all, or are human rights just something that is beside the point in today’s world?
MCMAHON: Thank you.
I think both of you can take a piece of this. Shannon, do you want to start, maybe talk a bit about what’s been happening at the border? You talked a little bit before about what the administration has been trying to do to pressure Mexico on accepting migrants and staging asylum-seekers. But can you talk a little bit more about what rights law is and what these migrants are facing?
O’NEIL: Well, many of the migrants that are coming up, a lot of the—especially—what’s different about this migration than, say, the early 2000s, which was predominantly Mexican young men coming and coming to the United States, and many of them coming in illegally, undocumented.
What’s different this time is a majority of those coming up are women and children. They are coming from Central America. They are not coming from Mexico. And many of them—most of them are claiming asylum. And when you start claiming asylum—the United States has signed on to these agreements—as has Mexico and most countries around the world—those individuals do have a set of rights, and the country receiving them, processing them, adjudicating their claims has a set of responsibilities. And that’s part of the, you know, quote, unquote, “crisis” that’s happening on that border.
It’s not that the numbers coming up are the record numbers that have ever come to our border; in fact, the early 2000s we saw more Mexicans coming up than Central Americans today—or a similar number. It’s that these people that are coming have a different set of rights, and the United States has a different set of responsibilities than they did in the past, and also that many of these are children, people—you know, young people, sometimes babies even that are coming up, and so it’s a different set of logistics and care challenges.
MCMAHON: And they are coming from these so-called Northern Triangle countries where there’s very high levels of violence.
O’NEIL: There’s very high levels of violence, there’s extortion, there’s gangs—some of them affiliated with the government. Sometimes there’s police officers and others. So there is a credible fear or claim of credible fear from the states, in some cases, or from state-affiliated entities that they are coming up with a claim.
Now Central Americans have not been particularly effective at making those claims over the past couple of years, but they still have to go through the process when they come, and they come with this credible fear. So that is part of the challenge. And this is why the United States wants Mexico to sign this safe third country agreement because if Mexico signed it—and the United States pushed the previous president, Peña Nieto, to sign one; he refused. Now they are pushing the current government to sign it—if they signed it, then Mexico would have to assume all of these obligations, and responsibilities, and protection of human rights that currently the United States has to assume when these individuals come up to the U.S. southern border. Mexico would have to assume them.
Now to go back to your question of, like, is this extortion and isn’t this asking them to abuse human rights, and the worrisome part here whether or not the Mexican government wants to protect these human rights—and let’s give them the benefit of the doubt. Let’s say they want to protect human rights. They don’t have the capacity to do so. They are standing up a totally new national guard that will be their main security leadership on all of these issues, which will also pertain to migration, so it is in formation. That will take, frankly, years, but many months to stand up, so they don’t have a body that can be trained in the right human rights and in the responsibilities toward asylum cases.
They have—their asylum agency—that bureaucracy is minuscule, so it does not have the reach to be able to process thousands and tens of thousands of claims that are already happening, much less if all these migrants cannot continue on to the United States. And so the ability, the capacity of Mexico to defend human rights in this process is lacking, and it’s one that even if the United States provided, you know—as the European Union provides in Niger—even if the United States provided a billion dollars to help it, it’s really about building up a bureaucracy. And so even if the money is there, you can’t do that overnight.
And, you know, I think the most stark comparison is the United States, with all of its resources, with all of the Department of Homeland Security, with CBP—with the Customs and Border Protection, with all of the resources we have, and the years of experience, and extent of bureaucracy, we’re not able to handle this. So Mexico would be hard-pressed to handle it and defend those human rights that you rightly bring up.
MCMAHON: Thanks, Shannon.
Ted, anything to add?
ALDEN: Yeah, I mean, just quickly, I mean, I think Jeff’s question is right on the money. I think if you had an administration in which human rights was factoring at all in its decision making—and I think it’s fair to say that this is the first administration certainly in my lifetime where human rights seems not to factor at all into the administration’s decision making—I think you would be looking at a different set of tools. It’s not that you wouldn’t be worried about enforcement at the border. There are obviously real problems there. But you would be looking at the question of aid to these countries to try to deal with both the economic and security crisis there. Instead this administration has been cutting off aid to those countries to punish them for the fact that their citizens are leaving. You would be looking at things like expanding in-country processing of asylum claims wherever you can do it to try to dissuade people from making the dangerous trip to the United States.
Under the Obama administration there had been a small effort set up in conjunction with the United Nations to allow, in effect, refugee processing in Costa Rica. If people could get Costa Rica they could make their claims there instead of, again, having to travel to the United States. That effort has been shut down.
So we’ve seen a policy here in which enforcement is absolutely the only tool. Human rights are not a factor. Anything that would deal with the sort of in-country concerns in the Northern Triangle that are driving a lot of this just does not appear to be of interest to this administration.
And I think what we are learning is that if enforcement is your only tool, you just make the problem worse, and I think that’s what this administration has been doing. The harder it pushes, the more threatening it becomes, the more it tries to violate the rights of people arriving in the United States, and making no difference in stemming the problem. If anything, it’s making it worse.
MCMAHON: Well, we’re almost near the end of our hour. I wanted to see if there is another question on the line we could fit in and then conclude this call.
Operator, another question, please.
OPERATOR: Yes, sir, our final question comes from Guy Erb, private.
Q: Good morning. Thanks, Shannon and Ted.
If there is a deal to be reached, what would it contain?
MCMAHON: Shannon, do you want to try that first and then Ted?
O’NEIL: Good question. (Laughter.)
No, I—(laughs)—I think there is—well, the big question is whether or not Mexico will sign on to this safe third country agreement. I think they won’t, and they’ve sort of mentioned it, it has been brought up, and they’ve mentioned that they haven’t, but that is what Washington wants.
There may be a deal that is stepped-up enforcement and promises of more enforcement for delaying these tariffs, but in the end, I think it will just be a delay. It will not be taking that, quote, unquote, “punishment” off the table—because I do worry. One, back to Ted’s analogy, is this Reagan or this Hoover, I increasingly think Trump is like Hoover, not like Reagan, so he just likes tariffs and he sees that as a solution to many problems.
And then as we head into the 2020 electoral season, you know, Mexico was the scapegoat and demon in 2016, and it worked really successfully for Trump. And so I think he will fall back on those tropes and Mexico will be at the brunt of it. And so migration at the border, terrible trade in Mexico ending, these things are not going to go away, frankly, whatever Mexico promises. And in fact, even if Mexico signs on to this safe third country agreement—which I don’t think they will, but let’s say they sign on to it—you know, this problem is not going to go away.
The asylum problem may go away. You won’t see—Central Americans who make it up to the southern border will not be able to claim asylum, but the movement of people and the desperation of these people, that is not going to end. And if Mexico goes into a recession, which, frankly, if they are trying to absorb tens of thousands, hundreds of thousands of Central Americans, and process them, and support them, I think that will hit their economy. Then you will see Mexicans at the border along with the Central Americans.
Ted, something to add?
ALDEN: I can’t say it any more clearly than that. I think that’s a good note to end on.
MCMAHON: Yes, indeed. So with that we will conclude this CFR on-the-record conference call.
I want to thank our experts, who really walked us through many of the aspects of this, CFR Senior Fellows Shannon O’Neil and Ted Alden. Thanks so much. And thanks to all of you for taking part in this call. This concludes this CFR call.