The debate over imposing a 20 percent border adjustment tax against Mexico has raised a number of questions, but one of the most imponderable is whether and how Mexico might retaliate should such a tax be adopted. The question is more than hypothetical. The record shows that Mexico has the means and the will to fight back. In fact, it has done so in the past. This posting presents some of the steps Mexico has taken and could take again.
Irrespective of whether the Trump administration endorses the proposal, the border tax has a chance of passing in light of the backing of House Speaker Paul Ryan and top Republicans in Congress as a means to raise revenue while reducing the corporate tax rate. Because the United States runs a $50 billion annual trade deficit with Mexico, applying a 20 percent tax on Mexican imports could generate billions in revenue for the US government, although the exact amount is unclear.
The 2007 US-Mexico dispute over trucking provides some clues on how Mexico might retaliate. Under the North American Free Trade Agreement (NAFTA), the United States and Mexico agreed to phase out restrictions on each other’s trucks crossing the border to provide passenger and cargo services. In 1995, the United States, under pressure from the Teamsters Union and citing safety concerns, refused to lift restrictions called for in the agreement. Mexico brought the case to the NAFTA dispute settlement mechanism in 1998, and in 2001 a NAFTA dispute panel found the United States in breach of its NAFTA obligations.
From 2001 to 2006 Congress passed multiple legislations that made it more difficult to comply with the NAFTA dispute panel’s finding. Mexican president Vicente Fox threatened to completely shut the border to American cargo trucks. After years of negotiations to settle the dispute, in 2007 the United States and Mexico agreed to cooperate in a joint trucking program as a step towards full NAFTA implementation. However, in March 2009 the United States terminated funding for the program again due to protectionist pressure. That same month Mexico retaliated by imposing duties on US exports to Mexico to compensate for the estimated $2 billion that it lost by being closed out of the US trucking market.
Mexico initially imposed tariffs ranging from 10 to 45 percent on 89 US products; in 2010 it added 10 more US products for a total of 99 but lowered the range of tariffs to 5 to 25 percent. These products had been tariff free. The tariffs targeted a variety of US sectors but disproportionately focused on agriculture, as Zahniser, Hertz, and Argoti find. Initially the tariffs covered 6 percent of US agricultural exports but just 1 percent of nonagricultural exports to Mexico. The later expansion of the tariffs to cover additional products again disproportionately affected agriculture. A US Trade Representative brief on the dispute lists the product-specific retaliatory duties Mexico imposed on US products. According to the Congressional Research Service, in total 43 US states were affected by Mexico’s duties.
In July 2011 the United States agreed to a three-year Mexican trucking pilot program in return for Mexico phasing out the tariffs. The pilot program concluded with the United States agreeing to expand opportunities for Mexican cargo trucks in the United States.
In this instance Mexico retaliated within the NAFTA dispute resolution framework. It is unclear what legal measures Mexico would take if the United States imposed a border adjustment tax against its exports to the United States. Mexico can clearly retaliate against US industries where it can do the most damage while itself experiencing the least repercussions, and where it can most easily substitute trade with the United States for another partner.
An escalation of trade sanctions could spiral into a full-scale trade war—or it could lead the two countries to resolve their disagreements and rescind the tariffs, as happened in 2011 in the trucking dispute. In a trade war scenario, Mexico could adjust its sector-specific targets for retaliation over time to inflict the most damage to US industry as trade and politics shift.