The president has opened a second front in the tariff wars. Instead of taxing goods coming just from China, tariffs on Mexican products have been threatened. But the action against our southern neighbor is being taken for significantly different reasons than those given for the Chinese tariffs.
Instead of the tariffs being used to correct unfair trade practices, they are being implemented to foster non-trade policy concerns. And that takes us into uncharted and dangerous places.
For decades, China’s trade policy has been aggressively unfair. It put up barriers that included not just tariffs but restrictive regulatory and business relationship requirements as well. It manipulated its currency to keep Chinese products cheap on the world market, suppressing competition.
Those actions meant U.S. consumers and businesses got great deals on Chinese goods, but they also unfairly undercut American companies and prevented other countries from being competitive and securing footholds in our markets.
But it didn’t stop there. There was and still is a concerted effort to steal the intellectual property of companies from around the world. Yes, many executives knew they were taking a risk to operate in China and did so nonetheless, but that doesn’t dismiss the Chinese behavior.
President after president tried to negotiate greater guarantees that intellectual property would not be stolen, but the efforts went largely nowhere. The current administration changed tactics and decided that imposing tariffs might force the Chinese to address the intellectual-property issue.
The tariffs on China were directed at correcting unfair trade activities. That is the traditional and most defensible reason to impose tariffs, though U.S. businesses and consumers have paid the costs.
As for the Mexican tariffs, they are being imposed because of a “national emergency” that relates to illegal immigration. This is a domestic and/or foreign policy issue that is usually handled through legislative or diplomatic channels. It is clearly not a trade issue.
The administration is claiming it is acceptable to use tariffs to force other countries to take actions that have little or no relationship to trade. Instead of using military force, the U.S. is employing its economic power to compel actions on the part of other countries.
Unfortunately, there are real and long-lasting consequences of these actions.
Consider trade agreements. The U.S. has concluded a treaty with Mexico (and Canada). Yet the U.S. still imposed tariffs on Mexico that are outside that agreement.
The intention of most trade agreements is to reduce barriers and tariffs. Why would any country enter into a trade pact if the U.S. could still impose tariffs to further its political and security agendas even if the country fulfills its responsibilities under the treaty?
The weaponization of tariffs means our trading partners will have to protect themselves. They will do so by becoming less dependent on American products and markets. Many American companies who are just innocent bystanders are going to be harmed.
For example, China can restrict the export of rare earth metals. These are used in a large variety of electronics and China controls the lion’s share of the supply.
While the U.S. doesn’t manufacture a lot of electronics, the possibility the industry would expand in the U.S. has probably been damaged, as China will likely limit rare earth exports to the U.S. on “security” grounds.
To protect its electronics sector, China will likely start expanding its semiconductor industry. It is well behind the U.S., but it is now a necessity that it reduce its ties to the U.S. so that its domestic firms can become more insulated from the threats of trade reprisals and restrictions.
Another concern is the agricultural sector. The Chinese import a significant amount of U.S. farm products. However, there are other countries that have the potential to meet China’s agricultural needs.
It is likely that over time, the Chinese will help develop those alternative sources. That would lead to a potentially large decline in U.S. farm exports to China. It might take an extended period, but it will eventually happen and that will greatly hurt U.S. farmers.
The key point is that the U.S., which has been traditionally viewed as a dependable trade partner, is losing that reputation. And countries are no different than companies — when a business partner stops being dependable, the relationship sours and often ends.