Mexico’s Retaliation — A Good Idea?

Cato’s Dan Ikenson posted today in favor of the trade retaliation measures announced by Mexico in response to the U.S. refusal to open its market to Mexican trucks, as the U.S. had agreed to do under the North America Free Trade Agreement.  Dan details the 15-year history of U.S. intransigence–which involves labor unions, environmental groups, and Congress putting up road blocks.  This recent move by Mexico expands the list of products that will have punitive duties imposed, since their earlier imposition of tariffs didn’t get the U.S. moving.

As a general rule,  I don’t support trade retaliation for a host of reasons — the first being that the measures end up harming people, the consumers in Mexico who have their choices restricted or face rising prices on those goods, and the U.S. exporters, who likely will face falling Mexican demand for the affected goods. Retaliation may also harden the opposition to free trade in the U.S., especially among the NAFTA-haters — the labor unions and environmentalists.

Trade retaliation also can escalate in a tit-for-tat fashion.  “We’ll find something we can get you on,” whether it be a pseudo-phyto-sanitary standard or some other non-tariff approach.

In favor of the Mexican retaliation, a solid argument could be made that the U.S. has acted egregiously in not living up to its NAFTA commitments over a 15-year period.  And Dan Ikenson has made a convincing case. A trade agreement is a contract, with procedures included for settling disputes relating to the agreement.  Mexican followed the rules, brought its complaint, and a NAFTA panel unanimously ruled in favor of them in 2001.  But, the U.S. delayed and tried to wiggle out of its commitments. So Mexico does wear the “white hat” in this dispute, and its actions are justified in the context of NAFTA.

What I’m concerned about is how the labor unions will use this and spin it — with calls of  “unfair” and “unsafe”– to further undermine support for free trade.  Already, the Teamsters’ Jim Hoffa has asked the president to challenge Mexico on the tariffs and said the only way to solve the problem is to not to open the U.S. borders to “unsafe” Mexican trucks but to “renegotiate” NAFTA.  And the labor unions have been running the trade show in Washington, with Congress’ advice and consent.  They have held up the three pending free trade agreements with Panama, Colombia and South Korea, and labor unions’ latest trade attack is focused on Guatemala for not abiding by their labor commitments in the Central America Free Trade Agreement.  They are flexing their muscles for the battles to come.  And it doesn’t bode well for progress on free trade.