Trump’s Little Mexican War

Doesn’t the “art of the deal” include giving your negotiating partner room to compromise? Mr. Trump made it impossible for Mr. Peña Nieto even to negotiate, all the more so after Mr. Peña Nieto went out of his way in August to invite Mr. Trump for a visit. That campaign stop helped Mr. Trump show he could stand on stage as an equal with a foreign leader, but Mr. Peña Nieto took a beating at home when Mr. Trump returned to Mexico-bashing.

When Mr. Trump visited the Journal in November 2015, we asked if the U.S. should encourage political stability and economic growth in Mexico. “I don’t care about Mexico honestly, I really don’t care about Mexico,” he replied.

.. Mexico’s main political parties have since traded stints in power, but both the PRI and the PAN have pressed economic reforms that have raised living standards and given Mexicans reasons to stay on their side of the Rio Grande.

.. Mr. Trump has accused Mexico of seeking a weak currency, but the central bank has been vigilant against inflation. The main reason the peso has fallen to 21 to the dollar from 17 in less than a year is Mr. Trump’s threats to destroy Nafta and start a trade war. The U.S. President is devaluing Mexico’s currency—the opposite of what he claims to want.

The Donald Trump Trade Effect: Watch the Peso, Not Ford

Mexico’s central bank raised short-term interest rateshalf a percentage point in response to the peso’s 11% plunge since Mr. Trump was elected. The Bank of Mexico is worried that the depreciation will push up inflation, and by raising rates it will restrain spending and contain those price pressures.

.. This, of course, is the opposite of what Mr. Trump intends. On the campaign trail, he cited the elevated U.S. trade deficit as proof of how foreigners were cheating the U.S. through badly negotiated deals like the North American Free Trade Agreement.

.. But as I noted in a column a month ago, Mr. Trump’s fiscal and trade policies are in conflict. His plans to slash taxes and boost infrastructure spending will inflate the budget deficit and stimulate an economy already close to full employment. To prevent an outbreak of inflation, the Federal Reserve will raise interest rates more quickly, pushing the dollar higher. The combination of a stronger dollar and stronger domestic demand will curb exports and suck in imports, causing the trade deficit to widen.

.. Ford’s decision to keep SUV production in Kentucky instead of Mexico at the margin will reduce imports from Mexico. But that will likely matter less than if less Mexican consumption and a strong dollar hit U.S. exports. Those are the unintended consequences of Mr. Trump.