Trump's Trade Plan: Raise Taxes on Americans to Punish Mexico Over Immigration

Disrupting North American trade would harm American consumers and businesses across the country. And President Trump knows it.

President Trump, frustrated that Congress has not approved the funding for his border wall, proposed escalating tariffs on Mexico until Mexico ends illegal immigration. According to the president, the tariffs—akin to a tax on US consumers—would start at 5 percent on all Mexican imports in June but could escalate as high as 25 percent by the fall.

Foreseeable Consequences

This comes on the heels of a threat (later withdrawn) to close the US-Mexico border for a “long time” unless Mexico prevents all illegal immigration into the United States. Reasonable minds can disagree on immigration policy and border enforcement strategies. However, disrupting North American trade would harm American consumers and businesses across the country.

And President Trump knows it.

While discussing closing the border, Trump cavalierly admitted that doing so would hurt the US economy. Mexico has traditionally been the United States's number three trade partner (behind China and Canada). But earlier this year, Mexico became our number one trade partner. For 2018, the United States’s total trade with Mexico was about $671 billion. Total US exports to Mexico last year were about $299.1 billion. It should be pointed out that about one-half of the total imports into the US are actually inputs into final products produced by the United States.

While all states would be affected, Texas, the nation’s top exporter, would be disproportionately harmed if cross-border trade were disrupted. Texas alone exports over $97 billion annually in goods that include computers and electronics, transportation equipment, energy, and agriculture to Mexico, our top trade partner. It is estimated that approximately 36.9 percent of Texas’s exports are sent to Mexico. Texas has an $8.5 billion annual trade surplus with Mexico. Sales into Mexico constitute about 5.7 percent of the Texas Gross State Product.

Jeffry Bartash, writing in Marketwatch, estimated that “if all the costs were passed on to US customers, they would pay an extra $17 billion over a full year under a 5% tariff. The price tag could jump to $87 billion if duties were set at 25%.”

Once market share is lost, there is no guarantee that American manufacturers will win back foreign customers after America’s supply lines are restored.

Disrupting the integrated North American supply chain could have a lasting negative impact. If international customers can’t rely on the supply of goods from US-based manufacturers, those customers might turn to manufacturers elsewhere (such as Europe and Asia). Once market share is lost, there is no guarantee that American manufacturers will win back foreign customers after America’s supply lines are restored.

Free Trade vs. Protectionism and Presidential Power

After NAFTA came into place in 1994, US agricultural exports to Canada and Mexico increased 288 percent. But a trade war that cuts off American farmers and ranchers from the Mexican market would jeopardize revenue and jobs, as well as strain their way of life.

Trump has made the threat to close the Mexican border for commerce before, walked it back, and renewed it, but he now seems intent on unilaterally imposing tariffs—presumably under the guise of national security. This move jeopardizes the ratification of the USMCA (United States-Mexico-Canada Agreement), or the renegotiated NAFTA 2.0. Business decision-makers are getting whiplash. One moment Trump is removing his steel and aluminum tariffs on Canada and Mexico. The next moment he is threatening tariffs on all Mexican imports. This basket case trade policy is making it exceedingly difficult for businesses to plan their operations, decide on capital expenditures, and manage their supply chains.

Senate Finance Committee Chairman Chuck Grassley (R-Iowa) responded to the president’s latest tariffs threat against Mexico by saying, “This is a misuse of presidential tariff authority and counter to congressional intent.” But it is not clear at this time what legal authority the president has to impose a tariff across the board on Mexican imports. It is risible to claim, for instance, that imports of avocados are a threat to national security (thus justifying tariffs under Section 232 of the Trade Expansion Act).

Unless Congress acts to rein in the president’s authority to impose “national security” tariffs, one man will make a decision that could unilaterally cause tremendous damage to our economy.

Immigration, border security, and trade are complex issues that require thoughtful deliberation. However, Congress (which through 2018 was controlled by the president’s party) has failed to reach a consensus on border security. Unless Congress acts to rein in the president’s authority to impose “national security” tariffs, one man will make a decision that could unilaterally cause tremendous damage to our economy. If that happens, there could be electoral consequences.

Again, Texas is the nation’s top exporter, and it relies on trade with its neighbor to the south. With Texas looking more and more like a 2020 swing state, the president’s indifference to the economic well-being of Texans, as well as the failure of elected officials to reach reasonable solutions, may bring political risk for the president and his allies if Texas consumers and businesses feel the pain of his misguided trade policies before election day.

Further Reading

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