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Mexicos Economy Minister Ildefonso Guajardo

Mexico Warns US It Will Cut Off NAFTA Talks If Tariffs Proposed

Feb. 27, 2017
Without NAFTA, trade between Mexico and the U.S. would be ruled by World Trade Organization strictures limiting tariffs either country can impose on the other.

Mexico’s top trade negotiator doubled down on threats to break off talks to rework NAFTA, saying his country will walk away if the U.S. insists on slapping duties or quotas on any products from south of the border.

“The moment that they say, ‘We’re going to put a 20% tariff on cars,’ I get up from the table,” Mexican Economy Minister Ildefonso Guajardo said in an interview. “Bye-bye.”

This doesn’t mean, Guajardo emphasized, that Mexico would be looking to scrap NAFTA. But by saying it refuses to even discuss the kind of tariffs President Donald Trump has long trumpeted, the country is ratcheting up the pressure on U.S. negotiators and effectively daring them to pull out of the 23-year-old pact.

Trump has lambasted the accord -- which also includes Canada -- as unfair and responsible for a “massive” imbalance favoring Mexico. It last year shipped $294 billion worth of goods north while the U.S. sent $231 billion south.

Mexican officials have said they expect official talks to start in June. And if they fail? “It wouldn’t be an absolute crisis,” said Guajardo, who headed the NAFTA office of the Mexican embassy in the U.S. in the early 90s, when the pact was being written and implemented.

WTO Alternative

Without NAFTA, trade between Mexico and the U.S. would be ruled by World Trade Organization strictures limiting tariffs either country can impose on the other, with the average for Mexico at around 3%, according to the Mexico City-based political-risk advisory firm Empra. That “would take away some of our margin of competitiveness,” the minister said, but would be manageable.

One thing that could help mitigate the impact is the tumble in the peso. It’s plunged 25% against the dollar in the past two years, swelling profit margins for exporters.

As things stand now, most products go back and forth duty free; automobiles, televisions sets and some other goods have to contain a certain amount of content sourced in North America to get full NAFTA benefits. But there’s been a lot of talk in Washington about taxing imports.

White House spokesman Sean Spicer in January floated the idea of a 20% levy on goods from Mexico to pay for a border wall. That trial balloon went up after Mexican President Enrique Pena Nieto canceled a trip to the American capital in response to Trump’s repeating a campaign pledge about charging Mexico for the cost of building the wall.

Some Republicans in Congress have called for what they refer to as a border-adjustment tax, affecting all countries, to help finance cuts in the corporate income tax. During the campaign, Trump was a fan of a 35% tax on auto imports from Mexico.

Pandora's Box Effect

Guajardo said part of the reason his country is unwilling to consider any new NAFTA duties is because of a possible domino effect. “Opening the door to tariffs is very dangerous, because it’s like opening Pandora’s box -- the lines of people asking for protectionism in Washington would reach to Maryland, and in Mexico City they’d reach to Puebla.”

The border-adjustment tax, he said, is something that’s squarely a domestic fiscal matter for the U.S. He also said it would be complicated to implement, and would no doubt result in mirror changes from other nations that would aim to level the playing field. Washington’s going that route “would require a crazy amount of control on the origin of merchandise and inputs.”

The U.S. is by far Mexico’s biggest single trading partner. But Mexico has pacts with more than 40 other countries, and has been accelerating free-trade talks with Brazil and Argentina after changes in those nations’ governments have them looking more favorably on open markets.

Brazil's Potential

In Brazil in particular, Mexico sees what Guajardo called “very, very high potential” in areas including automobiles. “I’m not going to negotiate with Brazil for its pretty face. I’m going to negotiate with Brazil because they’re going to open their car-manufacturing market,” said the minister, who has overseen negotiations for the Trans-Pacific Partnership and is working to update the country’s free-trade agreement with the European Union.

Mexico is also seeking to have TPP members join the Pacific Alliance, which includes Chile, Peru and Colombia. TPP nations have been invited to participate in the Latin American group’s meeting in March, Guajardo said. In one of his first acts as president, Trump pulled the U.S. out of the Pacific trade deal, designed to knit together almost 40% of the global economy.

For all his tough talk, Guajardo was optimistic the U.S., Mexico and Canada could come to terms on revamping NAFTA. “I think there is a way to find a very good agreement that will be a win-win for the three countries,” he said.

And while Trump has called NAFTA the worst trade deal ever, Treasury Secretary Steven Mnuchin said last week that he’s not worried about trade relations with Mexico and also sees a “win-win” result that can come out of NAFTA talks.

Guajardo said he wants talks to wrap up early in 2018. Otherwise, “we’d be irresponsibly injecting uncertainty after uncertainty because of the U.S. mid-term election and the presidential election in Mexico.” Mexicans go to the polls to choose a president in July 2018, and the U.S. mid-terms are that November.

By Nacha Cattan and Eric Martin

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Licensed content from Bloomberg, copyright 2016.

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