Consumers in the U.S. may pay for President Donald Trump’s planned 1,900 mile border wall, and Arkansas farmers could lose agricultural market shares in Mexico as a result of it.
Mexican officials have defiantly told the Trump administration the country will not pay for the series of walls and fences proposed to curb illegal immigration. It’s estimated the border edifice could cost $20 billion or more, and to get the project started, Trump has proposed a 20% tax on goods imported from Mexico to the U.S. If the tax is imposed it could begin a trade war, and the results could be disastrous for both countries, economist and former University of California at Santa Cruz professor Dr. David Kaun told Talk Business & Politics.
“We don’t want to have a trade war with anyone, especially Mexico,” Kaun said. “It’s a combination of the outrageous and of ignorance. Consumers will end up paying more, and that’s the bottom line.”
A trade war would likely lead to an economic slowdown in the U.S., Kaun said. It might not cause a recession, but it probably would have that effect in Mexico, leading to more desperate attempts by illegal immigrants to get into this country searching for work. U.S. jobs could be lost, and quality of life, such as access to fresh fruits and vegetables in the winter time could be hampered. A lot of what Trump is proposing to do defies many free market principles, he said.
Mexico is the U.S.’s third largest trading partner, according to office of the United States Trade Representative. In 2015, the two countries traded $531 billion worth of goods. Mexico exported $295 billion to the U.S., while the U.S. exported $236 billion to Mexico, down 1.6% from 2014. Exports to Mexico accounted for 15.7% of all U.S. exports in 2015.
More than 1.1 million jobs are tied to U.S. exports to Mexico, according to the U.S. Department of Commerce. Trade with Mexico has an impact on at least 5 million jobs in the U.S., according to Brookings. Top imports from Mexico to the U.S. were vehicles ($74 billion); electrical machinery ($63 billion); machinery ($49 billion); mineral fuels ($14 billion); and optical and medical instruments ($12 billion).
The U.S. imported $21 billion in agriculture products from its neighbor to the south in 2015. Leading categories included fresh vegetables ($4.8 billion); fresh fruit ($4.3 billion); wine and beer ($2.7 billion); snack foods ($1.7 billion); and processed fruits and vegetables ($1.4 billion).
Patrick Creamer, senior communications advisor for U.S. Sen. John Boozman, R-Ark., said Boozman supports a secure southern border but does not support a border tax to pay for it.
“Senator Boozman supports the President’s plan to build a wall to help secure our southern border. He believes we must use all available tools — including physical barriers, surveillance technology and manpower — to ensure that individuals crossing our borders are doing so legally. As for the President’s proposal to levy a tax on Mexican imports to fund the construction, Senator Boozman does not believe that it is a viable plan,” Creamer noted in a statement to Talk Business & Politics.
ECONOMIST: TRADE WAR WON’T BRING BACK MANUFACTURING JOBS
What will happen if the U.S. imposes an import tax is predictable, Kaun said. Mexico is likely to reciprocate the tax, meaning Americans will likely pay more for car parts, avocados, grapes, broccoli, tequila, and other products. For example, if an avocado on average costs $1 it might jump to $1.20, he said. That might not seem much of a jump, but in broad macro economic terms it’s significant, he said. A car made in Mexico that costs $20,000 today might cost $24,000 later. The U.S. imports billions of dollars worth of oil each year meaning gas prices could also rise.
Company profits in Mexico would decline as a result of lost market share, he said. Another problem would also be created. Direct U.S. foreign investment in Mexico topped $107.8 billion in 2014. As these companies lose money, these investments would be affected, he said.
Trump has also promised to scrap or revise the North American Free Trade Agreement (NAFTA) signed in 1994. Since NAFTA’s inception, U.S. exports to the country have grown by 468%. Service exports to the country topped $30.8 billion in 2015, a 196% increase from prior to the agreement being signed.
The results of NAFTA haven’t been all positive, Kaun said. The U.S. had a $58 billion trade deficit with Mexico in 2015, alone. From 1997 to 2014, the U.S. lost about 5 million manufacturing jobs, and thousands of plants have closed nationwide. Trump has often said he plans to stem the trade deficit and manufacturing job loss trend by revising U.S. trade policies. Companies can buy cheaper products in Mexico and American companies can’t compete with those prices in most instances, Kaun said. The longtime economist doesn’t think a trade war will bring those jobs back, he said.
Even if prices for products from other countries rose and became competitive to the point it would be financially reasonable for American companies to make them here, it doesn’t mean those companies would hire American workers. Automation is slowly replacing workers in all facets, he said.
THE AGRI IMPACT
Arkansas consumers may have to pay more for wares made or grown in Mexico, but farmers in The Natural State may lose valuable commodity markets if trade between the countries slows. In 2015, U.S. farmers sold $2.3 billion worth of corn to Mexico, the largest export market in the world for corn. Arkansas farmers harvested an estimated 735,000 acres of corn in 2016, a 290,000 acre increase from 2015, according to the United States Department of Agriculture. About 86.6 million acres of corn were harvested nationwide last year.
Mexico is the U.S.’s third largest agricultural export market totaling $18 billion in 2015, according to the Office of United States Trade Representative. The National Corn Growers Association has officials in Washington D.C. talking with Trump administration transition officials about trade agreements such as NAFTA, NCGA senior communications manager Mark Lambert told Talk Business & Politics. Lambert said his organization is “cautiously optimistic” there won’t be any agriculture trade disruptions.
“Trade is very important to us … 95% of all customers live outside our country’s borders,” he said. “Agriculture is something we do very well in the United States. We need to do as much business as we can with Mexico. They’ve been great customers.”
Corn trade with Mexico is vital for farmers, he said. Since NAFTA was signed, the agricultural exports market is five times larger with Mexico than it was in 1993, he said.
U.S. farmers exported $1.4 billion in soybeans to Mexico in 2015. When Trump scrapped the Trans Pacific Partnership, TPP, agreement, members of the American Soybean Association were stunned, board member Brad Doyle told Talk Business & Politics. TPP would have given Arkansas farmers greater access in Asian and Pacific Rim markets, he said. A soybean farmer from Weiner, Ark., Doyle said the TPP loss has caught the attention of many who support free trade. Through the years there has been virtually no talk about Mexico, but now it’s becoming a topic of conversation, he said.
“We’re still stunned by TPP’s demise,” he said. “We want policies and trade agreements that help our soybean farmers.”
Arkansas farmers harvested 3.12 million acres of soybeans in 2016, about 50,000 less acres than in 2015, according to the USDA. An estimated 83.7 million acres of soybeans were harvested nationwide last year, according to the USDA.
There are hundreds of soybean varieties and nearly all used to make livestock feed, Doyle said. Soybean prices have been depressed in recent years, because of a surge in soybean market growth in South America, especially in Brazil and Argentina. Farmers in those countries are slashing rain forest acres to create soybean farms. American soybeans tend to be a little more expensive, but they are better quality, Doyle said. If prices change much at all, quality won’t matter. Mexico may look to South America to buy more soybeans.
“Any loss is going to be negative,” Doyle said.
According to an analysis by WalletHub, nine of the 10 most negatively effected states by a potential trade war with Mexico voted for Trump during the 2016 general election. Texas was rated as the most affected, followed by Arizona, and Michigan. Arkansas was ranked 27th in the analysis. The least effected state was Alaska. Import/export numbers as a percentage of state gross domestic product, (GDP), jobs supported by trade with Mexico, and other factors were used to determine which states would feel the most or least affect from a trade war.
Kaun thinks the impact goes far beyond the import/export numbers, the jobs lost or created, and the loss of market shares. Blaming Mexico for Americans declining manufacturing base and stagnant earnings growth creates a social environment where some people feel emboldened to exercise racist rhetoric and actions – something our leaders don’t need to facilitate, he said.
The government needs to be diligent in reeducating the workforce and providing the tools necessary to compete in a changing jobs world, he said. The days when America is an industrial titan are slowly fading, and political leaders such as the president need to be honest with the American people. Many of those lost jobs are gone forever.
“With broader trade there will be more competition … with greater competition there will be winners and losers,” he said. “But that doesn’t mean we should engage in or worst tendencies towards one another. Our economy is evolving, and the workforce needs to evolve with it.”