Are Trade Wars the Answer for the Developing World?

By Ana Carolina Lessa
Managing Editor
September 6, 2010

One might think that sparking a trade war with a major commercial partner in the midst of a global economic recession with international trade experiencing its worse decline in the past 80 years might not be a well-informed decision.

However, President Obama, in violation of U.S. obligations under the North American Free Trade Agreement (NAFTA), decided last year to end the pilot program that authorized Mexican motor carriers to transport international cargo within the United States. Mexico has tried to negotiate with the United States in numerous opportunities for the past 18 months – including during Mexican President Felipe Calderon’s visit to Washington in May. Due to inactivity from their neighbors, Mexico announced, in retaliation, an increase in tariffs on 99 U.S. agricultural and industrial products worth more than $2.4 billion in exported goods. There has never been retaliation of this kind since the signing of NAFTA in 1994.

This list includes 99 U.S. products, with 26 previously tariff-free items, such as apples, oranges, pistachios, cheese, among others. Besides the economic value of this retaliation, there is also another aspect worth careful observation. Interestingly, the tariff list and timing seem to come hand-in-hand with the U.S. November elections. Most of the products on the list are from Wisconsin, Washington and California – key states with Democratic senators who follow the Teamster line. Regardless to say, Obama has picked an unnecessary fight with a reliable trading partner.

The Mexican government is waiting to receive a formal proposal to resolve this dispute and an explicit signal that the U.S. is working to eliminate the barriers that Mexican truckers face to access the U.S. market. If the Obama administration does not work fast, the country might risk ruining a relationship that has shown to be economically beneficial to the U.S. agricultural and industrial sectors. Last year, Mexico was the United State’s second-largest export market, totaling $151.5 billion in products shipped over their Southern border.

This is not the first sign of protectionism seen from the Obama administration, justified by arguments that the country cannot compete in the global marketplace. Besides the “Buy American” provision, where preferential treatment is given to domestic producers, despite higher prices paid by U.S. taxpayers, the United States has vehemently pushed for environmental and labor regulation clauses in trade agreements, making compliance nearly impossible, especially for least-developed countries. What’s “fair” about this kind of trade?

Earlier this year, after seven years of litigation, Brazil won the World Trade Organization (WTO) dispute against the United States on unfair cotton subsidies. This seemed to be a sign that the WTO’s dispute settlement mechanism is efficient, but what did this really mean? Initially nothing. Negotiation alone was not the answer. The United States decided to not comply with the neutral decision of the WTO. Despite confirmation of the damage that U.S. cotton subsidies were causing producers, Brazil still had to announce cross-retaliation in order to force the U.S. government to compromise. In the last minute, before Brazil raised its tariffs, both countries reached an agreement. Beginning this month, the United States has begun making regular monthly payments to Brazil through the newly created Brazilian Cotton Institute, which will decide how to use the money to help Brazilian cotton growers.

Trade wars have served an important role for least developed and developing countries as an instrument to push governments that are unwilling to negotiate, as shown in the Brazil vs. U.S. dispute mentioned above. When all diplomatic efforts fail, retaliation seems to always be an effective answer. So, was the Mexican decision to retaliate against its largest trading partner the best and only option they had?

The photo in this article is being used under licensing by Google Images. The original source can be found here.

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