Taking a page from his own playbook, The Art of the Deal, President Donald Trump made a sudden announcement. Trump is leveraging tariffs on Mexico in an attempt to threaten Mexico’s economy, which is highly reliant on trade with the United States. In 2018, Mexican exports to the US came in at $346 billion, over 30 percent of Mexico’s GDP.
In The Art of the Deal, Trump notes the importance of leverage during negotiations.
“The best thing you can do is deal from strength, and leverage is the biggest strength you can have,” wrote Trump “Leverage is having something the other guy wants. Or better yet, needs. Or best of all, simply can’t do without.”
Mexico is incredibly dependent on trade with the US, making tariffs a significant threat to the country’s economy.
“Mexico, given its high dependence on trade with the US, cannot afford to risk high tariffs causing substantial loss to competitiveness and the economy,” wrote Dev Ashish, a Société Générale research analyst, according to a report by Business Insider.
Trump announced the decision in a tweet, asserting that the tariffs would remain in place “until such time as illegal migrants coming through Mexico, and into our Country, STOP.”
Trump stated that “Mexico makes a fortune from the U.S.” Additionally, he claimed that due to the tariffs “companies will leave Mexico, which has taken 30% of our Auto Industry, and come back home to the USA.”
“Mexico must take back their country from the drug lords and cartels,” he continued. “The Tariff is about stopping drugs as well as illegals!”
Ashish believes that Mexico may not have many options aside from agreeing to a deal.
“The Obrador government will negotiate with the leverage it has in terms of trade relations with the US and business leaders’ interest in continuity,” said Ashish. “Nevertheless, in all probability, Mexico would have to offer concrete assurance to the Trump government if the US stands firm.”
While Ashish noted that getting a solution in place would take time, the value of the peso dropped significantly after the announcement of the tariffs, putting increased pressure on Mexico. Further, the tariffs may rise by 25 percent by October, which could make brokering a solution quickly a prudent decision from Mexico’s perspective.