During the late presidential election, Donald Trump vowed that he would build a wall along the U.S. and Mexican border. And, in typical Trump fashion, he insisted Mexico would pay for it. The establishment intelligentsia balked at the very idea. Mexican leaders laughed at the mere mention of a border wall (conveniently overlooking the Mexican policy that relies on a wall along its own border with Guatemala).
And yet, Trump has become the 45th President of the United States. Naturally, one of Trump’s first moves was to sign an executive order authorizing the creation of a border wall.
The Mexican response to this action was swift: President Enrique Peña Nieto opted to cancel his first meeting with Trump. A war of tweets erupted between the Mexican and American leaders. As the controversy wore on, elements of the Trump Administration floated the idea of imposing a 20 percent tariff on incoming Mexican goods, all in order to make Mexico “pay” for the wall. After much criticism from their political opponents, the Trump Administration indicated that it had walked this suggestion back (at least in public).
Indeed, Nieto and Trump have agreed to cease public commentary on their disagreement about the wall. Thus, the (first) great Twitter War between America and Mexico has ended in a dubious truce. Despite this, however, the need for greater border security—mainly a wall—remains. Trump’s recent executive order regarding the creation of the wall also remains in place.
So, with Mexico refusing to pay for the wall, and with the United States committed to building the wall, who will pay for it? This question is especially important, considering that the Trump Administration denied itself an obvious course of action when they refuted the plan of imposing a 20 percent tariff on Mexican goods. Another suggestion was to simply tax remittances to Mexico. Unfortunately, however, this is not a viable option. The tax would have a limited impact on money moving from the U.S. down to Mexico given the various informal ways to move the money across the border.
Here’s a simpler question:. Why doesn’t the Trump Administration simply impose regulations on America’s liquefied natural gas (LNG) supplies currently flowing from the American Midwest into Mexico?
Mexico’s economy depends on the steady flow of U.S.-supplied natural gas. Should the spigot be shut off (or, rather, should Trump merely threaten the energy flow), then the Mexican government would likely comply with U.S. wishes.
The dirty little secret in recent U.S.-Mexican relations is that Mexico has benefited “bigly” from America’s oil shale boom. At the start of the boom, there were already nine natural gas pipelines into Mexico from the United States. These pipelines supplied Mexico with almost one-quarter of its natural gas needs. According to a December 2016 Energy Information Agency (EIA) report, within three years, U.S. pipeline capacity into Mexico will double.
Until the last few years, Mexican power production has been so unreliable that rolling blackouts were a way of life for decades. This contributed to the economic instability of Mexico. Ever since the start of the oil shale boom in the United States, however, the steady flow of affordable LNG into Mexico has cut down on these problems in drastic ways. Indeed, if trends persist, Mexico’s rolling blackout problem could be a distant memory in just a few years. Believe it or not (current conditions notwithstanding), if Mexico can stabilize its economy, it will become become a great power.
Mexico needs America’s cheap LNG to have a chance at prospering or becoming a great power.. Should the Mexican government remain obstinate, then the Trump Administration should increase the regulatory burden on LNG exports into Mexico.
Increasing the regulatory burden on LNG exports to Mexico would remove the problem of imposing tariffs. Since the United States is a member of the World Trade Organization (WTO), the U.S. government is treaty-bound to avoid erecting protectionist trade barriers. If it does not respect WTO rules, then America’s fellow WTO members will penalize the U.S. This is likely one of the reasons why the Trump Administration has pulled back from its threat to impose tariffs on Mexico.
Now, President Trump has undone much of the Obama Administration’s burdensome environmental regulations with his executive orders. But at least some of those regulations can be re-imposed by another executive order. The Trump regulations (unlike Obama’s) will be temporary, and their scope would be limited. Once Mexico consented to our wishes, the regulations would be lifted and the LNG could flow freely.
Unfortunately, any proposed increase in regulations will not only harm the Mexican economy, but will also have a negative impact on the American domestic energy sector. This is to say nothing of the potential for economic retaliation from Mexico.
Undoubtedly, increasing regulations on U.S. LNG exporters to Mexico will have a profoundly negative impact on the domestic energy sector of our economy. In all fairness, though, the U.S. domestic energy market has not yet fully yielded the promises that many they sold when the oil shale boom began in 2010. Regrettably, global competition in the energy market is so stiff right now, that there is a limit for how much the U.S. can benefit from this trade (though that will likely change for the better over time).
But, this stiff competition from abroad does not mean that Mexico will get a better deal from another supplier. The affordability of U.S. LNG exports is the result of geographic proximity. In just 3 years, 50% of Mexico’s energy will be supplied by the U.S. They cannot just turn back from this reality. Essentially, it’s a seller’s market: we just don’t need to sell to Mexico as badly as they need to buy LNG supplies from us. And, while a specific industry may be temporarily harmed, President Trump will have resolved a long-term problem that has threatened the entire country.
Now, I realize that what I am advocating will likely send cultish free-traders into uncontrolled spasms. However, I am asking you to keep an open mind. After all, since FDR, the U.S. government has increasingly involved itself in the private sector by picking winners-and-losers, all to benefit a handful of elites. I am asking that Trump use this system to protect a majority of Americans. This shouldn’t be a partisan issue. It’s common sense (unless you’re one of the coastal elites).
Once the Trump Administration forces Mexico to play fairly in its dealings with us; once Mexico is forced to respect our national sovereignty by paying for a border wall, the United States and Mexico can resume normal, healthy relations. The U.S. wants a strong southern neighbor. A stable and peaceful Mexico means a secure and prosperous border with the U.S. American LNG plays a vital role in helping Mexico become more stable and prosperous. But, America must take a harder line in order to get Mexico to see reason. It will not be easy, though.
Temporarily increasing regulations on LNG exports into Mexico is a sensible solution for making Mexico pay for the wall. It avoids raising tariffs; it puts the U.S. in the driver seat; and it places almost all of the onus on the Mexican government. The Mexicans need to trade with America more than we need to trade with them. U.S. policymakers should remember that when negotiating with Mexico over paying for the wall. Ultimately, if and when the wall is built, the Mexicans will pay for it. The question is: how badly do the Mexicans want it to hurt before they have no choice but to concede to American wishes?