Mexico-US Trade Dispute – A Game Of Chicken
Risk watchdog has found at least one electoral pledge that President Obama appears to have followed through on since coming to power – his promise to renegotiate the terms of the North American Free Trade Agreement (NAFTA) to help US workers. Obama is not the first G20 leader to adopt protectionist measures in recent months, but by cancelling a pilot programme, which allowed Mexican truckers access to US highways, he has clearly angered his counterparts south of the border…and Mexico’s in no mood to take this lying down. By slapping tariffs on 90 US agricultural and household imports, Mexican President Calderón is showing he too can play the protectionist card. The big question now, though, is how do they proceed from here?
Personally I reckon there are three possible scenarios:
- Mexico Backs Down – This is unlikely given that Calderón is facing growing pressure at home for both his handling of the economy and the rising levels of violence in his battle with the country’s drug cartels. While these tariffs could keep inflationary pressures high, a strong stance towards the US is likely to play well to the local electorate, ahead of July’s mid-term congressional elections.
- Trade Dispute Becomes A Trade War – It appears as though we are currently in the early stages of a protracted trade dispute between US and Mexico, and while we believe that this is bad for Mexican and US consumers, political pressures on both sides of the border could mean that this dispute continues to play out over the coming months. While the interdependence of the two economies should keep dialogue open throughout, there is an outside chance that relations deteriorate to the extent that the dispute spreads to encompass much wider political and socio-economic issues.
- Agreement Is Reached After (Protracted) Negotiation – I see this as the most plausible scenario, given the pressure Obama’s administration is likely to face from US exporters who will feel brunt of the tariffs. However, with US protectionist sentiment likely to increase over the coming months, as the domestic economic outlook continues to deteriorate, any change in tact by the government will most probably be a long, drawn-out process, with neither side wanting to appear to be giving ground in any trade negotiations.