The Mexican president's abrupt cancellation of a White House meeting following President Trump's intensified pressure on Mexico to pay for a border wall not only raises the risks of a diplomatic crisis but the specter of an unraveling of the North American Free Trade Agreement.
While the tit for tat between Trump and Mexican President Enrique Peña Nieto may be merely posturing ahead of an expected NAFTA renegotiation, the opening gambits sparked concerns that the two sides were staking out hard positions that now include threats from both to pull out of the trade pact, which could prove costly for the economically intertwined countries.
"I think it's very dangerous -- dangerous economically and dangerous politically," said Timothy Wise, a globalization and Mexico-economy expert at Tufts University, referring the possible pullout.
Under NAFTA, which also includes Canada, any of the three countries can exit from the agreement after giving six months' notice. Trump had threatened during the campaign to walk away from NAFTA and to impose tariffs of 35% on Mexican goods coming into the U.S.
On Thursday, the White House proposed a complicated 20% tax on sales by U.S. companies of imported goods from Mexico and other nations to help pay for the wall.
Since his election, Trump and top economic officials have spoken frequently about their desire to renegotiate the 23-year-old pact, which many across the political spectrum believe needs to be revised and updated.
But Trump's early actions as president to crack down on illegal immigration and his insistence that Mexico pay for a wall across the southern border were met with tough responses from Peña Nieto and other Mexican officials, some of whom indicated that Mexico was prepared to leave NAFTA if there weren't clear benefits for their nation.
Wise said that Peña Nieto's decision Thursday to scrap a visit to Washington next week reflected domestic political realities after the Mexican president's popularity at home, now in the teens, began sinking last summer when he inexplicably invited Trump, then a presidential candidate, to Mexico, despite Trump's harsh rhetoric accusing Mexico of allowing criminals across the border and taking American manufacturing jobs.
Trump's tough protectionist talk on the campaign trail significantly weakened the peso, and on Thursday the peso fell sharply against the dollar after President Trump tweeted: "If Mexico is unwilling to pay for the badly needed wall, then it would be better to cancel the upcoming meeting."
The prospect of tariffs on goods from Mexico and other foreign countries would strengthen the dollar as more costly imports would reduce demand for them, which tends to push up the value of the dollar.
Trump noted in his tweet that the U.S. has a $60-billion trade deficit with Mexico (actually $58.8 billion through November), and he has suggested that the U.S. has the upper hand in bilateral commercial relations.
Although it is true that between the two Mexico is more dependent on the U.S. economically, their economies are closely linked, and analysts widely agree that a sudden cancellation would hurt both sides badly.
Two-way trade between the U.S. and Mexico has grown more than sixfold since 1993 to more than $500 billion last year, based on Commerce Department figures through November. A good chunk of that trade are cars, car parts and electronics -- much of which are sent back and forth in complex production processes. Mexico is also a top destination for American farm goods such as corn and pork, and the country is important in the supply chains for products such as apparel.
"We value the partnerships and relationships that have evolved over the last 20 years, with a very special emphasis on Mexico," said Augustine Tantillo, president of the National Council of Textile Organizations.
"We do not support its cancellation," he said of NAFTA, although he added that the agreement does need to be reviewed and updated.
Wilbur Ross, Trump's nominee for Commerce secretary who is expected to spearhead the president's trade policies, has indicated that he would like to see higher labor standards in NAFTA, including better wages for Mexican workers. Low wages in Mexico have lured many U.S. companies to move operations there.
Ross has also suggested the need for strengthening Buy America language to favor U.S. companies when it comes to U.S. government projects. In addition, the Trump administration is expected to push for changes in so-called rules of origin, which allow non-NAFTA contents to be moved among the three countries tariff-free. In the textile and apparel industry, for example, there are exemptions that allow companies to source fabric from non-NAFTA countries and receive preferences as long as they are cut and sewn in North America.
Tantillo said he wasn't worried yet about the future of NAFTA, but he said: "We're being more proactive in interacting with the Trump administration and others on Capitol Hill to communicate … we want to see NAFTA continue."
Although Trump has railed against NAFTA, the evidence of its economic effect has been more mixed. NAFTA certainly contributed to soaring exchange of commerce and closer economic integration among the three nations, as well as booming imports from Mexico and a widening of the U.S. trade deficit. But it is difficult to say precisely how many domestic factories and jobs were lost due to NAFTA.
American trade with Mexico was growing even before the agreement. And China’s joining the World Trade Organization in 2001 had a significant effect on shifting supply chains and production activity around the world.
After the 20th anniversary of NAFTA, the Congressional Research Service concluded that the trade agreement's effect on the U.S. economy was, on the whole, relatively small. And an earlier Congressional Budget Office report, released a decade after NAFTA, estimated that the accord added "probably no more than a few billion dollars, or a few hundredths of a percent," to the annual U.S. economy.
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