Trade War with Mexico?

By Steve LeVine of Businessweek.

Mexico has put $2.4 billion in tariffs on American items after the Obama Administration stopped some Mexican long-haul trucks from entering the U.S.

The Obama Administration, by putting an end to a program that allowed some Mexican long-haul trucks into the U.S., has triggered a slew of retaliatory tariffs from Mexico. The White House seems to be looking for a way to resolve a dispute that it failed to avert, despite much forewarning. But it looks like it may be too late to avoid the $2.4 billion in tariffs altogether, experts say.

On Mar. 16, Mexico announced tariffs on about 90 items from 40 U.S. states, mostly on agricultural products. It was retaliation for Congress' decision last week to kill a program meant to defuse a dispute that has lasted more than 13 years over the right of U.S. and Mexican long-haul trucks to cross each other's border carrying goods. Mexico contends that the U.S. is violating the North American Free Trade Agreement, which provides for free movement by each member state's trucks. Congressional critics say Mexican trucks are unsafe and do not belong on U.S. roads.

The dispute comes at a time of rising concern that financially ailing countries will erect trade barriers in an effort to boost their individual economies at the expense of other nations. In a statement on Mar. 17, the World Bank cited a rise of protectionism since the members of the Group of 20 pledged in November not to raise trade walls against each other. The bank said 20 G-20 countries had implemented 47 trade-restrictive measures against other nations in the last four months.
Detroit Bailout Draws Criticism

China had banned Irish pork and Belgian chocolates, India had banned Chinese toys, and America, in the eyes of many, had violated the spirit of free trade by bailing out Detroit. "Leaders must not heed the siren song of protectionist fixes, whether for trade, stimulus packages, or bailouts," World Bank President Robert B. Zoellick said. "Economic isolationism can lead to a negative spiral of events such as those we saw in the 1930s, which made a bad situation much, much worse."

President Barack Obama campaigned on a platform of stricter enforcement of existing trade agreements. But in the worsening financial crisis, he has sharply toned down his language and has instead joined the chorus warning against protectionism. Still, U.S. Trade Representative-nominee Ron Kirk has said the Administration will look to strictly enforce U.S. trade agreements.

Now the White Houe has to keep the clash with Mexico from escalating. John Murphy, vice-president for international affairs at the U.S. Chamber of Commerce, called the Mexican reprisal "a wake-up call" for the Administration. He said it demonstrates that, while the U.S. can focus on enforcement, it is vulnerable to economic retaliation. "We need to look at our side of the street as well," he said.

Teamsters Against Mexican Trucks

The dispute with Mexico goes back to 1995. The Clinton Administration was supposed to enact NAFTA's trucking provision, but opted not to do so. At the time, the International Brotherhood of Teamsters and other unions protested the provision. While critics of the provision cited the truck safety issue, supporters said the unions were more concerned about losing jobs.

In 2001 a NAFTA judicial ruling sided with Mexico's position that the U.S. was violating the trade treaty. But Mexico held back on trade reprisals while the Bush Administration crafted a pilot program that would permit a limited number of Mexican long-haul trucks to traverse the U.S. as a test to allay safety concerns. The program was launched two years ago as a transition to full-fledged compliance with the treaty. It has been clear for months that Congress intended to try to kill the program, and that if it did, Mexico would carry through on its threat to retaliate. Yet on Mar. 10, Congress passed a $410 billion government spending bill containing a clause inserted by Senator Byron Dorgan (D-N.D.) killing the pilot program, and the following day Obama signed it.

A study used as a weapon by both sides was issued on Feb. 6 by Joseph W. Comé, Assistant Inspector General for the U.S. Transportation Dept. The study concluded that long-haul Mexican trucks were in many cases safer than similar U.S. vehicles. But critics of the trucking provision note that the study included a caveat that, in Comé's opinion, the number of vehicles inspected was too small to be conclusive.
White House Seeking Conciliation

Dorgan called the Mexican reprisal "an outrage" in a Mar. 16 statement. "We are the country that should expect more from this one-sided relationship," Dorgan said, adding that the U.S. trade deficit with Mexico was $66 billion last year.

Teamsters President James Hoffa said in a statement, "The right response from Mexico would be to make sure its drivers and trucks are safe enough to use our highways without endangering our drivers. The border must stay closed until Mexico holds up its end of the bargain."

Obama's staff, in contrast, is making conciliatory gestures. On Mar. 16, White House spokesman Robert Gibbs said the Administration will work with Congress and Mexico "to propose legislation creating a new trucking project that will meet the legitimate concerns of Congress and our Nafta commitments." Gibbs added, "We don't want to find ourselves, in a time of economic slowdown, creating or erecting a barrier to that valuable trading partnership" with Mexico.
End Result May Mirror Pilot Program

Experts said the Administration will have a difficult time navigating among Mexico, the Teamsters, and Congress. But Gary Hufbauer, a trade expert at the Peterson Institute for International Economics, was optimistic that the Administration will succeed. Mickey Kantor, Clinton's trade representative from 1993 to 1997, said "there are interests on our side of the border that would like to stop the trucks forever," but that "the Obama Administration will sit down with them and work out an accommodation that makes sense."

The final product may look familiar, said John Magnus, a trade lawyer with the Washington law firm Miller & Chevalier. "I wouldn't be surprised if it ends up looking a lot like the pilot program that just got scotched," Magnus said. "It is a very logical intermediate step."

Some experts fault the Administration for failing to head off the trouble before it reached this stage. "Where was the Administration?" asked Bill Reinsch, president of the National Foreign Trade Council. "Having not made it go away, they are scrambling around. The Mexicans have retaliated, and they are left figuring out how to make lemonade out of lemons."