The new President of the United States of America (USA), Donald Trump, seems to be intent on fulfilling his campaign pledge to erect a wall along his country’s border with Mexico to stall further illegal immigration from Mexico and other Latin American countries. On January 25, 2017, Trump signed an executive order for constructing a wall along the US - Mexico border stretching 3100 kms. Trump also demanded that Mexico bear the cost of the proposed wall. These announcements have not only caused deep consternation in Mexico, but also drawn opprobrium from Latin American leaders. An immediate casualty has been the cancellation of the first working-level visit of Mexican President Enrique Pena Nieto to the US after President Trump assumed office.
The Mexican president has rejected outright, the demand for his country to pay for the construction of the wall, which obviously is not in Mexico’s interest. In the context of these developments, a scheduled meeting between the Mexican Foreign Minister Luis Videgara and the new US Secretary of Homeland Security John Kelly, on border management and immigration matters, has also been called off.
The Trump Administration is reported to be considering a set of punitive measures against Mexico if the latter does not agree to defray the construction cost of the wall. President Trump has issued an executive order directing all executive branches to identify all bilateral and multilateral development aid, economic assistance, humanitarian aid and military aid to Mexico over the past five years. This is obviously to identify the areas where Mexico’s dependence on the US is considerable, and pressure on Mexico could be effectively applied to accede to the US demands and cooperate towards construction of the border wall.
Trump also mentioned on January 26 that a 20 per cent tariff may be imposed on Mexican goods exported to the US to raise resources for building the wall. A 35 per cent border adjustment tax, in the garb of a border tax reform policy, on cross-border movement of goods has also been hinted at by the Republican congressional sources. It appears that there has been a repercussion to Trump’s threat. Ford has just cancelled a $1.6 billion automobile plant investment in Mexico. Earlier, Ford had planned to shift its Ford Focus small car plant from Michigan to Mexico which had drawn the ire of Trump. Similar pressure is building up on General Motors.
Tariff measures of the type aimed at Mexico, are likely to affect other western hemispheric countries also. Trump also proposes to tax remittances of Mexicans, and the US citizens of Mexican origin, to Mexico. Mexico’s economy minister has retorted that his government would respond immediately to any coercive trade action by the US administration. The Mexican Government has also indicated that it would not tolerate actions planned by the new US administration on the border wall and punitive taxation on the Mexican goods, as they impinge on Mexican dignity and pride.
Former US President George Bush had signed the Secure Fence Act in 2000 after congressional approval. The Act had approved construction of a fence along the US-Mexico border for approximately 700 of the total 1900 mile long border. As per the US Government Accountability Office (GAO), 652 miles of border fence-cum-wall has since been erected. The fence and other barriers that cover the 652 miles of the sanctioned border project, is actually a collection of walls, fence and other obstacles. The existing border wall is effective and strongest in places where large populations are concentrated e.g. San Diego, California on the US side, and Tijuana on the Mexican side. In some places, the wall passes through barren territory, and in many parts its condition is such that people can walk through. There are also portions of the border where the terrain conditions are difficult and it is extremely difficult to cross. The fence-cum-wall has been erected at a cost of US$ seven billion, and is not exactly impenetrable. This indicates the substantial effort and resources which will have to be deployed to cover the entire length of the border in an effective manner.
Though Trump has claimed that the erection of the wall would cost US$ eight billion, a realistic assessment is that it will be much more. Authoritative sources (like Bernstein Research Group), and the expenditure trend on the approximately 652 miles of wall-cum-fence constructed, indicate that actual cost of the entire border wall project will be in the range of US$ 15 - 25 billion. If the above-mentioned details are taken into account, the effort and expenditure on the border wall will be substantial, apart from the political and socio-economic fallout on American citizens in its southern border states like California, Arizona, New Mexico and Texas, as well as on its relations with Mexico. Republican Senator John McCain of Arizona has expressed deep concern on the proposed border wall and its serious implications on trade relations with Mexico, and also consequent economic consequences on his state of Arizona and the country as a whole. Republican Senator Lindsay Graham of South Carolina, has tersely observed that ‘border security yes, but tariffs no’.
The reaction to Trump’s utterances and avowed policies on the border wall and tariff has attracted strong criticism from the Latin American governments. In the January 2017 summit of the Community of Latin American and Caribbean States (CELAC) at Punta Cana in Dominican Republic, attended by ten heads of state and 33 foreign ministers, the consensus was that the Trump administration`s action was outrageous, and the CELAC group of countries have to respond to the new aggressive policy of prosecuting migrants. President Danilo Medina of Dominican Republic – the host country - and Rafael Correa of Ecuador took the lead in consolidating the CELAC countries’ position against Trump’s policy on the Mexican border wall – which they termed as a ‘wall of infamy’ , his anti-immigration plan and threat of escalated tariff.
Though the stance taken by Trump is not totally unexpected in the backdrop of his pre and post election utterances, it is surprising that he is rushing through his controversial policies soon after taking office. Actions which the US president has proposed before completing a month in office and even before delivering his first State of the Union Address, appear to indicate that he intends to take a posture of resoluteness on controversial issues, such as the US-Mexico border management and trade, in order to consolidate his domestic constituency. This forebodes political turbulence within the US, apart from introducing many imponderables in western hemispheric economic relations, and also undermining the existing North American Free Trade Agreement (NAFTA) which has served this hemispheric community reasonably well since its formation in 1994. It is also surprising that Trump, who is known to view developments and decide on policies in transactional terms, appears short-sighted and unwilling to view the implications of his policies on his country`s economy and international influence in a long-term perspective.
Mexico is the third largest import source and trade partner of the US. Mexico is also the second largest export market, and the third largest agricultural export market of the US. The Mexico-US trade is more than US$ 583 billion (US imports: $316 billion + exports $267 billion: as per 2015 US Trade Representative Office data), and the US foreign direct investment in Mexico is more than US$ 107 billion. It is not clear whether Trump has weighed the impact of a higher tariff barrier on Mexican exports to the US, and the consequent impact on the US consumers. There would also be supply chain problems because of the cost impact on the US intermediate components that are exported to Mexico, value-added there and re-exported to US, which would be affected by the proposed escalation in tariff.
Any constriction in Mexican exports and supply-chain problems, would have a huge negative impact on the US industry and its labour market. The US industrial goods sector, automobile market and even its agriculture, would be affected. Interestingly, the US upper middle country, mid-west and the southern states – the ‘rust belt’ which had voted overwhelmingly for Trump in the last presidential elections, would be impacted the most. This is because, Mexico would definitely retaliate by imposing countervailing tariffs on the US exports, particularly those which are leviable on goods to be imported and exported after value addition in Mexico. Mexico is also likely to raise tariffs on agricultural imports from the US of corn, dairy products, pork and beef estimated at more than $18 billion, which in turn will affect consumption in Mexico and the US farming community. Mexico is also likely to resort to fiscal measures to restrict profit plough-back from the US investments.
Trump has indicated on many an occasion that the US economy and jobs are his primary concern. The slew of actions which he is contemplating is unlikely to benefit either. A cost-benefit analysis seems to indicate that negative international repercussions and even domestic political fallout, would decidedly outweigh the economic gains which are difficult to assess at this stage.
The author is a commentator on international affairs and a retired IDAS officer who has held senior positions in the Government of India and in a State Government.
The views expressed are the author`s own.