US Mexico deal – Why So Fast – What’s Up?

On Friday it was announced that President Trump had negotiated a deal with Mexico to help stem the flow of migrants to the US and allowing him not to impose the 5% tariffs on Mexican imports on Monday 10^th June i.e. tomorrow.

If this deal had not been reached, these tariffs would have risen by 5% every month on goods including cars, beer, tequila, fruit and vegetables until they hit 25% in October.

The President took much criticism for this threat so much so that major commercial bodies within the US criticised the decision and even Republican senators both publicly and especially behind closed doors were not only critical but threatening rebellion stating that trade policy should not be used to deal with immigration issues.

Clearly these warnings hit home, and an arrangement has been made.

In a joint declaration released by the US state department, the two countries said Mexico would take “unprecedented steps” to curb irregular migration and human trafficking – the result of 3 days of intense negotiation.

Under the deal;

Mexico agreed to:

Deploy its National Guard throughout the country from Monday, pledging up to 6,000 additional troops along Mexico’s southern border with Guatemala and to take “decisive action” to tackle human smuggling networks.

The US agreed to:

Expand its programme of sending asylum seekers back to Mexico while they await reviews of their claims. In return, the US will “work to accelerate” the adjudication process

Both countries pledged to “strengthen bilateral co-operation” over border security, including “coordinated actions” and information sharing.

This declaration added that discussions would continue, and final terms would be accepted and announced within 90 days. So the tariff threat has receded for now but of course if there is an impasse in 90 days then who knows what will happen, we suspect neither do the parties to the Agreement as all that it states for now is that  Should Mexico’s actions “not have the expected results”, additional measures could be taken – but did not specify what these would be.

Now before everyone claims total US victory it did not however achieve one of its major demands which would have required Mexico to take in asylum seekers heading for the US and process their claims on its own soil. But in all negotiations, there has to be give and take.

President Trump said:

“Mexico will try very hard, and if they do that, this will be a very successful agreement.”

However not everyone in Mexico is happy with the arrangement between President Trump and Mexican President Andres Obrador

Ángel Romero, a senior member of the left-wing PRD party, tweeted that the agreement was “not a negotiation, it was a surrender……Mexico should not militarise its southern border. We are not the backyard of Donald Trump”

However Mexican Foreign Secretary Marcelo Ebrard told journalists: “I think it was a fair balance, because they have more drastic measures and proposals at the start, and we have reached some middle point.”

But how did such an agreement be reached so quickly?

Well its worth bearing in mind that Mexico is currently one of the largest trading partners of the US, just behind China and Canada – (two countries who are also locked in trade disputes with the US).

So why the special treatment?

Well first of all we have to be mindful that Mexico’s trade with the United States rose to $203.18 billion through the first four months of 2019. That’s 3.33 percent above its total trade during the same time period last year. U.S. exports to Mexico decreased 0.23 percent while U.S. imports from Mexico rose 6.11 percent. The U.S. deficit with Mexico was $30.84 billion.

Policy makers in the US felt that even a 5% tariff would hurt US suppliers and customers too as they would have to pay the tariffs.

But there is lurking in the background a more important point to bear in mind. An Achilles heel if you like. This whole dispute arose because of the ever- increasing numbers appearing at the US Mexico border seeking asylum. If the US entered into a trade war with Mexico, and this resulted in less goods being sold to the US, the already fragile Mexican economy could have been pushed it into a full recession and created more migrants heading north in search of work.

President Trump is already under siege to do something about the numbers and this would have made the situation even worse – something that could derail any success he may have in the 2020 Presidential elections.

Also, have you heard idiom “the straw that broke the camels back”? well this could have been it because on the announcement that these tariffs were going to be put in place stock markets immediately fell and the US dollar value fell. Traders were also concerned that the USMCA (United States-Mexico-Canada Agreement) – the replacement to NAFTA – would be jeopardised and this would indeed affect equity markets globally as well as GDP growth for all of those concerned.

From what has happened over what has only been a little over 1 week we have perhaps learned 2 key points:

1. President Trump has now tied immigration to bilateral trade and could negotiate in similar ways across the world tying together 2 very disparate issues in an attempt to gain leverage – so this will prove interesting
2. Much of his policy making from now will be almost entirely centred upon his 2020 Presidential bid. He must achieve his promises from the first campaign, appear tough, but also needs to ensure a vibrant economy with a high stock market number.

Whether he can achieve all this, only time will tell, but for certain we envisage more disputes and quick apparent resolutions – “we live in interesting times”  Robert F. Kennedy once said in 1966 – and we agree – but we also hope that the actual saying “May he live in interesting times” – which is a Chinese curse – does not fulfil its prediction.