First as Farce, then as Tragedy

US & Mexico to enter trade war over wall?

The world is learning with increasing dismay to take President Trump's wildest campaign pronouncements more seriously by the day. Assumed by many a penguin in fox's clothing, his twin pronouncements on January 25 to build a wall along the 1,989 mile border with Mexico and hire an extra 5,000 border police and 10,000 immigration-enforcement officers have fallen like a hammer upon optimistic, aloof, or simply naïve ears.

While the row over who will pay for Donald Trump’s wall is only just beginning, it is clear that the long-term cost will far outweigh the estimated USD15-25 billion needed to build it. If accurate, that figure is daunting but historically unremarkable—the equivalent of funding the Iraq and Afghanistan wars for less than a month, conflicts whose initial phases lasted for eight and eleven years, respectively, at that level of expenditure.

The upfront cost also masks considerably larger long-term ones: USD750 million a year to maintain the wall, and an annual USD2.1 billion for 21,000 border agents to man it. But like every bloodied coin, this one has two sides. As the first of Trump’s much-heralded infrastructural projects, the wall will lead to short-term employment boosts in (largely red) states along the border. After all, like terrorism and large-scale penal projects, national security is often a byword for a jobs program. American, not Mexican, firms will build, maintain, and man the spidery, 2,000-mile horizontal wall.

But to speak of spikes in concrete and stun gun production is to mask the most important costs of Trump’s wall: the damage it does to long-term US-Mexico relations and bilateral trade. Worth USD482 billion in 2016 alone, commerce across the Rio Grande is the third largest bilateral relationship in the world—second only to Uncle Sam’s wheeling and dealing with Canada (USD500 billion) and China (USD528 billion). Can this relationship survive such a public and calculated indignity as a heavily fortified 2,000-mile middle finger?

However far from God, Mexicans are unusually forgiving of their clamorous northern neighbor. But President Nieto is still an elected official. Widely mocked for hosting a bumptious Candidate Trump at Los Pinos in September, on January 27, Nieto canceled his state visit to Washington in response to Trump’s announcement two days before that the wall would go through as stated on the campaign. In response to cancelling his trip, Trump threatened to slap a 20% tariff on all Mexican imports in order to finance his great fence.

Mexican Foreign Minister Louis Videgaray was quick to condemn the move. “A tax on Mexican imports to the US is not a way to make Mexico pay for the wall,” he retorted, “but a way to make the North American consumer pay for it through more expensive avocados, washing machines, televisions.” Mexico’s economy minister made even more sinister predictions, warning that any tariff on Mexican goods would be met with a Mexican retaliation to “neutralize the impact of such measure.” A trade war of this magnitude would reverberate around the world and even trigger a global recession, he said.

Whatever the case, markets have already punished the peso, which lost nearly 5% of its value against the dollar between January 26 and 27 as fears of a broader bruising spread. While the border states would suffer the most from any such tit-for-tat, citizens of the rustbelt states whose struggling constituents not only propelled Trump to the highest seat in the land, but are the intended beneficiaries of the spoils of any such trade war also stand to lose in the form of more expensive auto parts, cars, farm goods, textiles and food, whether produced in the Midwest and shipped to Mexico or vice versa.

Indeed, the economies of Michigan, Ohio, and Pennsylvania—all of which surprisingly sprung for the Donald—are particularly reliant upon trade with Mexico. These states produce many of the vehicles, electrical machinery, and minerals that make Mexico the recipient of 15.7% of all US exports. Altogether, some 5 million American jobs depend upon exports south of the Rio Grande, from the farmers who grow the barley that goes into Mexican beer to the USD2.3 billion of US corn that goes into Mexican tortillas each year.

Yet the industry by far the most affected would be automotive. In 2015, more than 2 million Mexican-made passenger cars and light-trucks were imported to the US, nudging Mexico past Japan as the largest exporter of automobiles to the Land of the Free and the fourth largest in the world (after Germany, Japan, and the US, in that order).

The great irony of this week’s tit-for-tat is that Nieto’s scheduled visit to Washington had the explicit intent of renegotiating certain portions of NAFTA. Still at the very beginning of one of the most bizarre, confused, and acrimonious First 100 Days in American history, these unprecedented meetings would have afforded Washington and Detroit no small measure of home-court advantage. That Nieto would even concede the negotiability of NAFTA a week into the Donald’s presidency was a signal victory for the Bannonites. Now that negotiations are (momentarily) off the table, it’s far less clear who this week’s victors are—currency traders notwithstanding.

That a US-Mexico trade war now appears far more likely than one with Beijing is a bitter twist to an increasingly unpredictable drama. Yet if this week’s spat has achieved anything, it’s to show that its casualties vastly outweigh the costs of a much-detested wall. In layman’s terms, the die has been cast on the global economy’s most dangerous game of chicken: who will be the first to pull off into the roadside ditch? Trump has another 1,397 days to govern, while Nieto is up for reelection next July.

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