Virginia economists: Trump’s tariff threat is ‘unsettling,’ and could have ‘serious long-term damage’
By Davis Burroughs
June 13, 2019

President Trump threatened historic tariffs against Mexico in recent weeks, then claimed already-established agreements between Mexico and the United States were the result of his threats and an “incredible” deal worthy of a national holiday.

Trade with Mexico may seem like a national issue, but it has real effects in Virginia. Consumers in the Commonwealth could see prices increase on the $1.5 billion worth of goods imported from Mexico each year. The U.S. Chamber of Commerce estimates that Trump’s proposed tariffs would add as much as $365 million to the cost of those goods. And if Mexico retaliated with tariffs of its own, the situation gets uglier — Virginia businesses exported over $3 billion worth of goods to Mexico in 2018.

So what do economists in the state have to say about this back and forth?

John McLaren, an economics professor at the University of Virginia and an expert in North American trade agreements, says Trump’s move to weaponize tariffs against a trade partner is alarming.

“The idea that we have a government that would actually threaten five percent escalated to 25 percent tariffs based on whatever current disputes are going on between two countries, is actually pretty weird and I would consider it to be pretty unsettling,” McLaren said in an interview.

McLaren said he was “flabbergasted,” when he read about the tariff barbs, in part because Trump appears short on political capital to pass his new North American trade deal, known as the U.S., Mexico, and Canada agreement, or USMCA, which is separate from Friday’s pact.

“If you’re saying regardless of our free trade agreement with Mexico, we’re going to put tariffs — even really high tariffs — on things with Mexico, at the drop of a hat when we don’t like what they’re doing, that’s essentially saying the agreement we just signed that we want you to ratify is barely worth anything at all,” McLaren said.

“It seems to be an odd diplomatic strategy signal to the world that you’re so willing to throw away the agreements that you had negotiated,” he said.

The USMCA would be a hallmark achievement for Trump, who made cutting better trade agreements a central campaign promise. But striking trade deals requires significant political investment — presidents need to build a lot of support for these pacts in Congress — and McLaren doesn’t see a whole lot of momentum towards ratification of the USMCA right now.

“It seems like [the new trade deal] is just sitting there in a freezer and nobody is really doing anything much about it.”

Kerem Cosar, also a UVA economics professor, said Trump’s tactics won’t sit well with other countries, either. “The whole open trade system works on a big trust,” Cosar said in an interview.

“If you fear that your major trade partners one day may put an embargo on you or maybe try to play their market power card…then you’re going to seek other sources of supply and probably will diversify and try to cut back your long-term dependence [on them].”

Cosar predicted that if Trump continues to play games with tariffs, then China will probably import more from Brazil, and other nations will increasingly see European countries as more reliable trade partners than the U.S.

”If you feel like you are being held at a gunpoint, then you will seek alternative sources,” Cosar said, which could lead to lower long-term demand for various American products.

If Trump is concerned, he’s not showing it. Despite reaching an agreement with Mexico to withdraw tariffs in exchange for border security, the president said new tariffs were not off the table. He called into a CNBC talk show to justify his tactics on Monday: “Without tariffs, we would be captive to every country,” he said.

McLaren offered one possible explanation as to why Trump would resort to serious economic threats to get something he likely could have gotten anyway: “The administration has no shortage of domestic things from which they would like to keep their supporters distracted.”

Likewise, Cosar said this was “by and large internal politics.”

Whether diversion strategy or cunning negotiation maneuver, Trump’s theatrical tactics with Mexico are not without political and economic consequence.

“There’s a diplomatic liability to portraying oneself as an unreliable negotiator,” McLaren said.

Cosar said he’d be most concerned about how the U.S. negotiates with China moving forward.  

The U.S. and China are currently engaged in a trade war that Trump started. And from their perspective, Trump’s Mexico drama make it look like he’s desperate to score points, because the internal politics of this move are a “mess.” As a trading partner, it doesn’t make the U.S. look very reliable.

Elsewhere, Cosar said Trump’s Mexico feud is creating a “huge distrust and uncertainty for trade partners,” and causing “serious long-term damage” that is “really hard to repair.”

Screenshot of Dow Jones Industrial Average, showing slide on May 31, 2019 after Trump threatened tariffs on Mexico

Wall Street doesn’t love Trump’s tariff flexes, either. The first threat spooked investors, leading to one of the worst days for U.S. stock markets this year.

Republicans in Congress also criticized Trump’s weaponization of tariffs, warning the move could sink the USMCA, which still needs to be ratified by Congress. Last week, Republicans scurried to write legislation that would block tariffs, should Trump follow through on his threats.

Related Stories
Share This