Southern Tensions: US-Mexico Relations Under Trump

April 20, 2017
Donald Trump has made no secret of his intentions to shake up American relations with the world. Verbal exchanges, including a tweet from the President’s first week in office that prompted Mexican President Enrique Peña Nieto to cancel their first meeting as heads of state, have brought the historically strong relationship to a tremendous low. [1] However, proposals from the Trump administration have officials from both states concerned about more than just words. Trump’s executive order for “the immediate construction of a physical wall on the southern border” and a proposed 20 percent tariff on all imports from Mexico will have serious effects on production and trade in North America.[2]

Current Effects

Some of the effects of chilled relations are already being felt. Retail sectors in El Paso and other border cities benefit greatly from the porous nature of the border, which allows Mexicans to purchase goods in downscale American stores. The fall of the Mexican peso relative to the dollar largely contributed to anticipations of increased barriers for exporting goods from Mexico, which means foreign consumers are already buying less American goods.[3]

A recent executive order also made it much easier for the federal government to deport undocumented immigrants vital for the U.S. economy. In the last 15 years nearly half of the hired laborers employed in the American agricultural sector lacked the immigration status needed to work legally in the United States. A reduction of the number of undocumented laborers in the United States would produce a long run decrease in output in all sectors of the economy. This would also decrease the income of other factors of production including human capital and skilled labor.[4]

<p>Source: <a href="https://www.ers.usda.gov/webdocs/publications/err135/20514_err135_1_.pdf?v=41219">USDA, Economic Research Service</a></p>

Source: USDA, Economic Research Service

Major Production

If the Trump administration’s proposals for enacting tariffs on imports are actualized, the broader economic ramifications are substantial. Mexico is America’s third largest trading partner after Canada and China, through the North American Free Trade Agreement (NAFTA). This trade, which makes up nearly half of Mexico’s GDP, is mainly comprised of two-way exchange of vehicles, machinery, and electrical equipment, one-way trade from the United States to Mexico of beef products, and one-way trade from Mexico to the United States of mineral fuels and agricultural products. The trade relationship garnered $267.2 billion in U.S. exports and $316.4 billion in U.S. imports in 2015. [5] While this did produce a trade deficit that President Trump has used as a pretext for proposing changes to NAFTA, this figure is lower than the average American trade deficit with Mexico over the last decade, and it is at one of the lowest points in the last several decades as a percentage of total U.S. exports to Mexico. [6]

Auto Industry

One of the largest reasons for this large trade deficit is the auto industry. Currently, auto parts are the primary good shipped across the Mexican border into the United States every year. In 2015, America imported $78 billion in cars when the annual goods trade deficit was $58 billion. The large effect the auto industry has on the trade balance has caused President Trump to reconsider checks on tariffs established by the NAFTA negotiations. This, according to proponents of Trump’s policies, would encourage the manufacturing of auto parts within the United States, which would help increase domestic jobs. Analyses show that if President Trump increases tariffs by 20-45%, there will be economic growth for the first year as unemployment rates drop, the trade deficit decreases, and transportation costs are cut. However, after the first year, there would be an indefinite economic slump as U.S. exporters lose clients, domestic prices increase, and businesses cut back investments due to higher tariffs that make trade impossible.[7]

<p>Source: <a href="http://money.cnn.com/2017/01/09/news/economy/us-mexico-trump-cars-imports-trade-deficit/">Capital Economics, 2015 figures</a></p>

Source: Capital Economics, 2015 figures

Furthermore, changes in NAFTA would greatly impact transnational corporations. More specifically, higher trade barriers would affect American corporations with branches on the Mexican border. Transnational corporations in the United States often have manufacturing and production plants on the Mexican border to reap the benefit of cheaper labor and resources in Mexico while minimizing their transportation costs. These corporations are able to hire Mexican laborers for an average wage of $4.35 a day - around $135 monthly - while American factory workers demand and typically earn about $2000 a month.[8] Financially, these corporations benefit from outsourcing manufacturing and production to Mexico and importing the finished goods back into the United States. As President Trump would like to increase domestic jobs and decrease the trade deficit, his proposed tariffs make outsourcing to Mexico fiscally irrational. This position has been supported by American labor unions and several economists who believe outsourcing manufacturing exploits both American and Mexican workers. However, this policy change, if implemented, would also have extremely negative consequences for the American economy. Domestic corporations would be forced to hire laborers domestically, who usually demand higher wages than Mexico, causing prices across the country to increase and expansion through trade to various countries to decrease.

Healthcare Products

In addition to auto-manufacturing and agricultural production, Mexico is a major source of medical devices and healthcare equipment. Since 2001, U.S. reliance on imported medical goods has tripled to its current level of 30 percent of total medical equipment used.[9] American companies like Medtronic and DJO Global concentrate production on the Mexican side of the border, specializing in devices ranging from defibrillators to ultrasound equipment and even bandages. Implementing a tariff on these goods would certainly raise the cost of American health care system, though by how much is still not clear. [10] Hospital systems in the United States are even more worried about access to these necessary devices if imports from Mexico decrease. Decreased supply means that some patients will not receive the treatment they need and will bear the increased costs along with with already strained hospital systems.

<p>Source: <a href="http://money.cnn.com/2017/01/09/news/economy/us-mexico-trump-cars-imports-trade-deficit/">Capital Economics, 2015 figures</a></p>

Source: Capital Economics, 2015 figures

Mexico is the world’s largest supplier of medical equipment to the United States, and this production is particularly difficult and time-consuming to transport since making these goods requires special training and manufacturing facilities. The Food and Drug Administration also has a rigorous inspection process that ensures that even small production factors are in line with regulations, which can take months for a new manufacturing facility to go through. Due to how stringent the manufacturing process is for medical devices, it will take much more time to move this production to the United States than other industries.

Conclusion

The current economic relationship between the United States and Mexico has a significant influence on the American economy, consumer costs, and other policy areas that rely on a stable exchange of goods and services in North America. The Trump administration’s proposals and posturing towards our southern neighbor have not won the United States any new friends within Mexico, but the implications of changes in tariff policy, immigrant status, and border security will have serious consequences that go beyond diplomatic ties.

References

  [1] http://www.newyorker.com/news/ryan-lizza/donald-trump-blows-up-the-u-s-mexico-relationship 

  [2] https://www.theguardian.com/world/2017/jan/26/trump-calls-for-20-tax-on-mexican-imports-to-pay-for-border-wall 

  [3] http://www.businessinsider.com/donald-trump-mexico-border-economic-policy-effect-on-texas-border-area-2017-1 

  [4] https://www.ers.usda.gov/webdocs/publications/err135/20514_err135_1_.pdf?v=41219 

  [5] https://ustr.gov/countries-regions/americas/mexico 

  [6] http://fortune.com/2015/08/10/is-donald-trump-right-that-mexico-is-killing-us-on-trade/ 

  [7] http://money.cnn.com/2017/01/09/news/economy/us-mexico-trump-cars-imports-trade-deficit/ 

  [8] https://www.foreignpolicyjournal.com/2017/02/01/trumps-new-protectionism-economic-and-strategic-impact/ 

  [9] https://www.nytimes.com/2017/03/31/business/us-mexico-trade-medical-devices.html?_r=1

  [10] https://www.export.gov/article?id=Mexico-Medical-Devices

PENN WHARTON PPI
RESOURCE SPOTLIGHT: