United States - Mexico: Mexico Strikes Back with Tariff Hikes in U.S. Truck Dispute

IHS Global Insight Perspective: Mexico's tariff retaliation on U.S. imports heralds a major trade-policy challenge to U.S. President Barack Obama, testing his vague position on the North American Free-Trade Agreement.

Significance: In a retaliatory move, Mexico announced tariff hikes on U.S. imports yesterday, raising the spectre of tit-for-tat protectionism as it presses for the resumption of North American Free-Trade Agreement (NAFTA)-mandated cross-border access for its trucks.

Implications: The decision forces the U.S. administration to seriously consider its position on NAFTA and wider commitments to free trade. President Barack Obama has previously advocated a renegotiation of NAFTA, but to date it seems pragmatism and other more pressing concerns have shifted this off his agenda.

Outlook: Details of the tariffs remain vague and it seems they will not affect many of the key traded commodities; however, the move is a powerful diplomatic statement that will require Obama to adopt a clearer stance on trade.

• Trade Escalation?

The government of Mexico announced yesterday that it will proceed with tariff hikes on selected U.S. imports, in retaliation over the expiry of a pilot programme for Mexican truck transit. In the so-called "Omnibus" spending package approved last week, Congress decided to scrap the scheme, which allows a limited number of Mexican long-haul trucks to transit American roads (see United States: 11 March 2009: U.S. Congress Reverses Previous Administration's Travel Restrictions on Cuba). The decision shattered faint hopes for the expansion of such rights to a larger number of trucks, and terminated a measure that had provided some respite for ongoing bilateral trade tensions. Under the North American Free-Trade Agreement (NAFTA), truck access on both sides of the border should be fully opened. Alleging a clear violation of NAFTA provisions, Mexico's Economy Secretary Gerardo Ruíz Mateos confirmed that the tariffs sanction will be applied to up to 90 U.S. agricultural and manufactured goods originating from a total of 40 U.S. states. However, an official Mexican source quoted in Reuters said that wheat, rice, beans, and corn exports were unlikely to be affected given their prominent role in the national diet. It is not yet clear when the sanctions will come into force and which items will definitely be affected. In an assuaging move, the U.S. administration called for a new truck programme to be devised. However, this would certainly face some opposition in Congress where protectionist sensitivities have been heightened by the economic crisis. The powerful U.S. truckers' union Teamsters is likely to flex its lobbying muscles against any new proposal. There is some pressure from the free-trade side too, nonetheless. Republican Senator John McCain renewed calls for the presidential administration to reconsider its position and avoid an escalation of protectionist retaliation moves.

• Outlook and Implications

The sanctions threaten to have negative effects both for U.S. exporters and for Mexican consumers; hence the likely decision to avoid tariffs on more sensitive U.S. exports such as corn and wheat. It remains to be seen how the United States responds—sufficiently emollient language could prompt the Mexican authorities to back down. This will undoubtedly be high on U.S. Secretary of State Hillary Clinton's agenda when she visits the country next week (see United States - Mexico: 16 March 2009: U.S. Secretary of State to Pay First Latin American Visit, to Mexico). Both Clinton and Obama have been cool on NAFTA on the past, even though Clinton's husband, former president Bill Clinton, was its champion. Obama has certainly softened his language on trade since taking office, warning repeatedly against tit-for-tat protectionism in the midst of the economic crisis. His administration has also said that it wants to move forward with bilateral free-trade deals that were previously stalled by Democrats in Congress. At the same time, the administration has run into international controversy over the "Buy American" clause in the fiscal stimulus package. Its position on free trade thus remains somewhat ambiguous; the current spat with Mexico should give a clearer picture of where it really stands.

Contacts: James Dorsey / Senior Manager, Media Relations / Corporate Communications / 781 301 9069.

IHS Global Insight: www.ihsglobalinsight.com