Waging a Two Front Trade War Is a Losing Economic Strategy and Will Not Solve the Border Crisis
The United States is already embroiled in a trade war with China, and launching a second offensive against Mexico by levying tariffs on Mexican imports will not solve the border crisis. However, it could jeopardize final ratification of the United States Mexico Canada Agreement (USMCA) and result in the reinstatement of retaliatory tariffs that Mexico recently lifted on American exports. Both of these possible outcomes would dim America’s bright economic prospects by raising prices for U.S. families and threatening U.S. jobs.
Beginning on June 10, the United States plans to impose a five percent tariff on all imports from Mexico with five percent added to the percentage each month that the “crisis persists.” The White House explains that “if Mexico still has not taken action to dramatically reduce or eliminate the number of illegal aliens crossing its territory into the United States,” we can expect 10 percent tariffs on goods entering the U.S. from Mexico on July 10, 15 percent on August 10 continuing each month until a 25 percent cap is reached in October. This misuse of the Emergency Economic Powers Act is unlikely to stem the flow of migrants toward our southern border, however, it will deal a blow to a wide range of U.S. business sectors including agriculture, automobiles and energy.
Agriculture
The effects of the tariffs on American consumers will be rapid. Last year, the U.S. imported $28 billion of food and beverages from Mexico consisting largely of fresh fruits and vegetables. Because of the tight profit margins for these items, sellers will pass the excess costs of the tariffs on to American consumers almost immediately.
In May, Mexico lifted retaliatory tariffs that it had placed on U.S. agricultural exports that added up to $19 billion 2018. Mexico’s levies were in response to the Administration’s steel and aluminum tariffs and targeted soybeans, corn, beef, dairy and pork which are many of the same items that were devastated by China’s retaliatory tariffs. Our southern neighbor may view the Administration’s proposal as justification to reimpose their recently lifted tariffs on American agricultural products.
Autos
Trade in automobiles and auto parts represents the largest segment of cross border exchange supporting 10 million American jobs and totaling $125 billion in imported vehicles and auto parts annually. The White House statement that “companies located in Mexico may start moving back to the United States to make their products and goods” betrays a fundamental misunderstanding of 21st century auto manufacturing. During the manufacturing process, autos and their parts cross borders numerous times. As a representative from the Center for Automotive Research put it, “the U.S. and Mexico are not trading with each other so much as they are building the same products together.” The highly integrated supply chains that underpin auto production cannot be reconfigured in weeks or even months – it will take years at the cost of American jobs. The American auto industry relies on this cooperation to remain economically competitive.
Far from luring businesses back to the United States, enacting tariffs leads to uncertainty that will discourage manufacturers from building in America. Foreign automakers like BMW, Honda, Volkswagen, Toyota and Nissan have invested in our communities creating jobs and providing invaluable training opportunities to U.S. workers. The tariffs on Mexican imports will lead these foreign economic partners to question our nation’s commitment to maintaining a predictable business environment and the wisdom of future investment in America.
If fully enacted, the tariffs on Mexican imports will increase the cost of a family car by four percent inevitably leading to a decrease in car sales as well as the predictable downstream impact on the communities and small businesses that depend on auto manufacturing and sales.
Energy
Cross border energy trade is robust and mutually beneficial. The United States imports between 600,000 and 700,000 barrels of crude daily which is processed into gasoline, diesel, jet fuel and other products by American refiners. Some of the refined products are exported back to Mexico helping to make up the 1 million barrels of fuel daily that our southern neighbor imports from us. Mexico is the top destination for U.S. petroleum products.
In addition to oil, twenty pipelines transport five billion cubic feet of American gas daily to Mexico with additional gas arriving by tanker. American energy exports are vulnerable to retaliatory tariffs which could slow down pipeline construction threatening jobs for U.S. workers.
Unintended Consequences of Tariffs
Ultimately, the American people would shoulder the burden of the proposed tariffs with price increases on the goods they buy every day – an estimated cumulative $900 billion spent over the course of 10 years – and lost jobs. An analysis by the Perryman Group projects the loss of 400,000 American jobs due, in part, to the disruption of delicate supply chains across a range of business sectors. Texas and California would be particularly hard hit.
However, the most devastating impact of the Administration’s trade policies is and will continue to be the steady erosion of global in confidence in America’s position as a reliable and predictable economic partner. This reputation has attracted enormous amounts of job-creating foreign direct investment (FDI) and has encouraged economic partners to yield to American demands during contentious trade negotiations. USMCA benefits American industry, and imposing tariffs on Mexico can only risk finalizing that deal.
There is a genuine crisis on America’s southern border. However, the best long-term strategy to discourage the flow of migrants is to help improve conditions in their home countries. The decision to reduce aid to Central America exacerbated an already escalating problem and should be revisited. In the meantime, working with Mexico to address capacity issues south of the border could produce real results, and DHS and HHS need more resources to deal with the current influx. Now might also be a good time for Congress to demonstrate the political courage needed to enact comprehensive immigration reform. Migrants at our frontier with Mexico are a small part of our nation’s immigration picture.
Tariffs, which are not even an effective remedy for trade challenges, will not solve the border crisis. However, they could imperil final ratification and implementation of USMCA, strain the budgets of American families and cause the world to question America’s position as a coveted trading partner.