July 22, 2019 at 5:00 am ET
North American businesses breathed a sigh of relief when President Donald Trump announced that his administration would no longer impose a punitive 5 percent tariff on Mexican goods following Mexico’s promise of tougher border security. By threatening to impose these retaliatory tariffs, the Trump administration applied these trade instruments to one of our most critical free-trade markets as leverage in order to score political points and further his unrelated migration agenda.
Industry voices across many sectors were unified in their opposition to the tariffs, reflecting our economy’s increasing reliance on North American supply chains. Andrew Hunter, senior U.S. economist with Capital Economics, noted that automobile parts are “crossing the Canadian or Mexican borders as many as eight times during assembly,” and that if tariffs were imposed, these supply chains “would quickly become uneconomical.” Companies would have to rely on less efficient suppliers, consumer prices would rise and thus demand would decline, reducing national employment.
Our robust system of North American agricultural trade would have also suffered. According to the Mexican Secretary of Agriculture, Mexico and the U.S. traded about $130 million a day in agricultural products last year. A 5 percent tariff would have decreased that trade by $3.8 million a day, a non-negligible amount. If Mexico responded, our nation’s farmers, who have already seen retaliatory tariffs resulting from this administration’s trade battles, would have suffered further. This tit-for-tat ends up hurting both exporters and American consumers.
The ramifications could have stretched far beyond North American trade. Other countries have witnessed how Trump introduced the threat of new tariffs on Mexico despite the United States-Mexico-Canada Agreement (USMCA), which aims to remove all cross-border tariffs, a previous agreement by all sides. Other trading partners might decide that there is no guarantee the U.S. will keep their word on any future agreements, or might even be concerned about the potential for current agreements to be threatened for political posturing.
Fortunately, the administration has backed off from its tariff threat to Mexico – for the moment. Now, through USMCA we can prevent these cascading negative consequences from impacting the economy. In order to ensure the stability of North American supply chains and thus, sustained and quality growth, it is imperative that Congress passes the USMCA as soon as possible. USMCA passage would avoid any potential termination of the North American Free Trade Agreement (NAFTA) or future tariff threats that would throw our interconnected markets into turmoil.
There is widespread agreement among businesses that the USMCA entails an improvement upon NAFTA. Today, 78 percent of automotive executives believe that the new trade provisions will have a positive impact on their company in the long term. Ford Motor Company declared they expected USMCA to “support an integrated, globally competitive automotive business in North America.”
The energy sector will also benefit, as Canada and Mexico rank as the top purchasers for American crude oil, natural gas and other refined fuels. Since the energy sector relies on a wide variety of industries, from steel manufacturers to infrastructure construction, North American energy demand supports long-term investments in all industries connected to the supply chain. USMCA is also strategically important because it will continue to bolster North American energy security and allows us to absorb external shocks from other foreign sources than seeking alternative markets.
It is crucial to modernize our North American trade policy to compete in an increasingly digital world. Therefore, the e-commerce and digital concerns addressed in USMCA are a welcome change to an agreement last updated in the early 1990s. Rich McArdle, president of UPS Freight, expressed his support for the upgrades and commented that “when data can be harnessed and transferred and evaluated long before goods ever get to the border — that’s very exciting … it is going to take some costs and complexity out of the freight between [the three countries].”
Not only will our trade markets be secured, they will also be expanded in some cases. U.S. efficient dairy farmers will regain access to currently heavily regulated Canadian dairy markets. Elsewhere in agricultural markets, American produce growers have seen their exports to Mexico triple over the past 25 years and the continuation of open markets under USMCA will be critical in maintaining their regular flow of trade with Mexico.
Congress and the administration should focus on passing USMCA this year as it will strengthen all industries that rely on the North American supply chain, while benefiting consumers, who are being hurt every time a tariff is imposed. A large, modernized and stable market will provide the needed process of digital innovation, e-commerce and patent protection that is the true motor of growth.
Dr. Claudio M. Loser is president of the Centennial Group Latin America, which provides guidance on strategies, policies and approaches to realize opportunities enabled by increasing flows of private capital, technology and management know-how in the region. He’s a senior fellow at the Inter-American Dialogue, a U.S.-based center for policy analysis, exchange and communication on issues in Western Hemisphere. He also served as IMF Western Hemisphere director from 1994 to 2002.
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