Trump's border tax plan raises fears of trade war

An American flag flies above early morning traffic at the San Ysidro Port of Entry for the US-Mexico border crossing in Tijuana, Mexico, on Jan 26, 2017.
An American flag flies above early morning traffic at the San Ysidro Port of Entry for the US-Mexico border crossing in Tijuana, Mexico, on Jan 26, 2017. PHOTO: BLOOMBERG

Mexican peso battered as US President floats idea to impose 20% tax on imports to build wall

WASHINGTON • President Donald Trump's decision to build a wall along the US border with Mexico has stoked his first foreign policy crisis and the possibility of a trade war with an important neighbour.

The row, played out over Twitter, began as Mr Trump pressed forward on Wednesday with a plan for a 3,000km border wall and insisted that Mexico would pay for it.

Mr Trump, who had been scheduled to meet his Mexican counterpart, President Enrique Pena Nieto, also brushed aside his neighbour's objections by tweeting: "If Mexico is unwilling to pay for the badly needed wall, then it would be better to cancel the upcoming meeting."

Matters quickly went downhill from there. Mr Pena Nieto scrapped his trip to Washington, and the Trump administration hit back by floating the idea of imposing a 20 per cent tax on all Mexican imports.

It later appeared to back down slightly by saying this was one among "a buffet of options" that it was exploring.

The Mexican peso took a battering with each new development.

The testy exchanges between the two close neighbours have raised the chances of a trade war that could hurt them both deeply.

Other nations could also be drawn in, potentially hurting consumers around the globe.

The US and Mexico trade in goods worth US$1.4 billion (S$2 billion) every day. Mexico is the second-largest foreign market for US-made products, and 80 per cent of Mexican exports - vehicles, televisions, avocados - are sold to the US.

If Mr Trump does eventually announce his support for the tax plan to fund the wall that is expected to cost as much as US$20 billion, it could penalise US consumers and companies as much as Mexico. The prices of imported goods could rise, and companies dealing in them could see their profits slashed.

Mexican Foreign Minister Luis Videgaray alluded to this when he said: "A tax on Mexican imports to the United States is not a way to make Mexico pay for the wall, but a way to make the North American consumer pay for it through more expensive avocados, washing machines, televisions."

US vehicle makers could also take a beating. Ford Motor, General Motors and Fiat Chrysler all have assembly plants in Mexico, as do Honda, Mazda and Volkswagen.

Almost five million American jobs depend on trade with Mexico, according to Mr Christopher Wilson of the Mexico Institute at the Woodrow Wilson International Centre for Scholars.

Despite the possibility of collateral damage, Mr Trump has appeared determined to build a wall to keep illegal immigrants from Mexico at bay. This was one of his key campaign promises.

But a border tax could lead to retaliation from Mexico, said Senator Lindsey Graham, a Republican from South Carolina. "Any tariff we can levy, they can levy," he tweeted.



A version of this article appeared in the print edition of The Straits Times on January 28, 2017, with the headline 'Trump's border tax plan raises fears of trade war'. Print Edition | Subscribe