Trump’s Risky Mexican Trade Standoff

John Fund

President Trump effectively opened a new trade war last week by imposing a 5 percent tariff on all Mexican imports — and one that could rise to 25 percent by October if Mexico doesn’t do more to combat illegal immigration to the U.S.

Everyone agrees that Mexico could and should do more, but Trump’s own top trade adviser, Robert Lighthizer, warned that the move’s awkward timing could jeopardize ratification of the new U.S.–Mexico–Canada trade agreement. Lawmakers in the three countries have not yet approved the deal. The tariffs not only put Trump’s signature trade accomplishment in jeopardy, but they threaten to increase prices for U.S. consumers of everything imported from Mexico — items ranging from avocados to clothes to medical devices.

The tariffs also threaten carefully constructed supply chains that allow the efficient transfer of goods, technology-based services, and raw materials. During a recent trip to Guadalajara, I toured several facilities that are part of the increasingly intricate web of supply chains delivering benefits to both Mexico and the U.S.

Take spirits, a growth industry in both countries. Tequila is Mexico’s national spirit, and almost all of it is produced in the Guadalajara area. But its ownership is international. At least eight tequila brands have U.S. ties, including Herradura, which is owned by Kentucky whiskey distiller Brown-Forman. Also on the list is Patron, which was owned until recently by John Paul DeJoria, of Paul Mitchell hair-products fame.

Tequila is still a fully Mexican product, but free trade with the U.S. and Canada has spurred investment that has turned it into an international sensation. In the 1990s, over 90 percent of tequila consumed in the U.S. went into margaritas, and only 2 percent was high-grade premium tequila (made from 100 percent agave). Now more than half of U.S. tequila imports are premium labels. And labels owned by the likes of George Clooney and Justin Timberlake have given the spirit cachet. Raising the price of tequila by up to 25 percent could sour the spirit’s prospects on both sides of the border.

But as important as tequila is to Guadalajara, tech is the real local growth sector. The U.S. company GoPro has announced that most of its cameras will be produced in Guadalajara by the end of this year — a shift from the Chinese factories on which it formerly relied. Universal Electronics is also moving, from China to Mexico, its production of remote controls meant for the U.S. market. Foxconn, the Taiwanese firm that builds iPhones for Apple, is opening Mexican plants.

The services sector is also being reconfigured by increased cooperation between Guadalajara’s tech firms and the United States. One of the companies I toured was iTexico, a software-development firm that helps U.S. firms. In just the last year, iTexico has grown 50 percent. It now has more than 300 employees and is truly a cross-border company. Its headquarters are in Austin, Texas; it has a regional office in Silicon Valley; and its software-development center is in Guadalajara, where it can draw from the 30,000 students enrolled in technology programs in the area’s universities. Firms such as IBM and Microsoft have benefited from iTexico’s ability to allow clients to build a team that can do software development from start to finish on highly flexible schedules.

President Trump’s goal of forging a new U.S. trade policy that creates a more level playing field for U.S. products is a worthy one that has eluded all of his predecessors. Some of his tough talk and hardball actions are probably overdue.

But it’s awkward having too many trade targets at any one time. Every few weeks, it seems, Team Trump bounces from China to the European Union to China as its major trade target. The interdependence of the world economy is fragile, given that more and more products and services have cross-border ownership and ties. A tough negotiating stance on trade is welcome, but it must be accompanied by an understanding of just how much damage could be done if driving a hard bargain were to take a back seat to impulsive behavior.

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