Robert Robb

opinion columnist



If Mexico were economically stronger, and wiser, it could finesse its Trump eruption.

President Donald Trump has repeatedly declared that trade with Mexico under the North American Free Trade Agreement is unfair and vows to renegotiate or rip it up. Mexico’s economy is highly dependent on exports to the United States, so this has roiled its currency and market confidence.

Trump's beef isn't really with NAFTA

Yet Trump has not identified anything specific in NAFTA that he regards as unfair. The only specific he has mentioned is that U.S. exports to Mexico are subject to Mexico’s Value Added Tax, but Mexican exports to the United States are not.

This, however, isn’t part of NAFTA. And it isn’t unfair. Goods sold in Mexico are subject to the VAT, irrespective of their origin. Goods sold in the United States are subject to whatever taxes apply here, irrespective of their origin.

SENATORS:Trump better be careful how he renegotiates NAFTA

It’s simply a function of how respective governments choose to finance themselves. But the incidence of taxation is neutral with respect to trade on both sides of the border.

NAFTA critics on the left complain that it is not tough enough on environmental and labor standards. But the nationalist Trump is unlikely to share the view that such domestic policies should be harmonized across national borders.

Trump actually let the cat out of the bag in the joint press conference he held with Canadian Prime Minister Justin Trudeau, who appears to be serenely finessing the Trump eruption. There wasn’t really any big problem regarding trade with Canada, Trump allowed. The big problem is with Mexico.

If Canadian trade is fine, what's the problem?

But the rules of trade with Canada under NAFTA are precisely the same as the rules of trade with Mexico. If the rules of trade with Canada are fair then, ipso facto, so are the rules of trade with Mexico.

There is nothing unfair about NAFTA. Trump just doesn’t like some of the effects of free trade with Mexico that result from its comparative advantage in lower labor costs.

The only way to neutralize this comparative advantage would be through tariffs. Trump can huff and puff all he wants about tariffs, but he lacks authority to unilaterally impose them on Mexican imports.

VIEWPOINTS:When Trump blames Mexico, it hurts Arizona

He could withdraw from NAFTA. But that would leave in place very low tariffs in both countries. Cross-border trade would remain largely free.

Trump has some discretionary ability to impose tariffs under American law, but only in retaliation against unfair trade practices by others. Mexico doesn’t engage in any. It doesn’t subsidize exporters. Its exporters aren’t dumping goods in the United States below cost. Its markets are generally open to American goods and services.

If Trump sought new authority to impose tariffs on Mexican imports, he would fail. Domestic stakeholders in trade with Mexico are too numerous and politically strong for that to pass.

Nor does Trump have any practical way of requiring Mexico to pay for a border wall, another huff and puff that has Mexico on edge.

How Mexico should react to Trump

Mexico feels vulnerable to Trump’s threats, and it mostly has itself to blame for that.

Mexico has done many big things right regarding its economy. It has achieved a stable currency, a rarity in Latin America. Its capital markets are relatively free. It has opened up its oil industry to private and foreign investment. It has partially deregulated telecommunications, transportation and electricity.

But Mexico has failed to do the little things that would create a vibrant domestic economy less reliant on exports.

Roughly a fifth of the country’s economic activity remains off the books. And that’s independent of the drug trade. About 60 percent of Mexican workers still labor in the informal economy.

DIAZ: Did Trump just threaten Mexico with military action?

There’s a reason for that. According to the World Bank, Mexico ranks 93rd among the world’s countries in the ease of starting a new business. According to Transparency International, Mexico ranks very low in honest governance, 123rd. Mexico ranks low in economic freedom indexes, primarily because of the lack of an impartial and reliable legal system.

The sensible reaction by Mexico to Trump would be to wait him out while moving with alacrity to reduce barriers to a higher performing domestic economy.

Instead, Mexico is taking offense to a border wall that, excluding the Trump bluster about paying for it, isn’t really any of Mexico’s business. Some prominent Mexicans are talking about Mexico paying defense costs to fight deportations, in an attempt to gum up the system to the point of collapse. And domestically, the political stock of a leftwing demagogue who would take the country in exactly the wrong direction is rising.

Mexico shouldn’t rise to Trump’s bait.

Reach Robb at robert.robb@arizonarepublic.com.