Trade Insight from FMA Economist Dr. Chris Kuehl

Recently I have been asked this question in a variety of ways, and it has been very hard to answer. I have compared this analysis to trying to nail jello to the wall. The parameters of the debate seem to change every day, and nobody yet knows with any confidence what happens and when.

We can start by pointing out how closely connected the two states have become, and this will make it abundantly clear that trade attacks on Mexico will severely damage both the U.S. and Mexico. The two economies are not really rivals in any sense — they have become complementary economies with very well-integrated supply chains. Every day close to $1.5 billion worth of products cross the border. Mexico buys almost $250 billion per year from the U.S., which is twice as much as China buys and more than the European Union. The exports to Mexico from the U.S. account for over 1 million jobs in the U.S. Another 6 million depend on trade between the two states in sectors as diverse as transportation, law, and accounting. The facts are about as stark as they can be. The NAFTA relationship and the trade ties with Mexico are vital to the U.S., and if the extreme threats are carried out, the U.S. GDP would decline by between 1.5 and 2.0 percent.

As it became obvious that no measure exists in the world to force a nation to pay for something in another nation, the question of how to finance the wall developed. The proposed solution was the imposition of a 20 percent tax on all goods that would be exported from Mexico into the U.S. This extreme position created an instant reaction from business on both sides of the border, with U.S. automakers, retailers, and members of the farm community in the lead as far as opposition is concerned. The plan has bogged down in Congress as there is a desire to take a more expansive approach to exports and imports with some kind of “border adjustment.” This would be broader and not targeted at Mexico as it would impose some kind of tariff on imports into the U.S. while encouraging exports out of the U.S.

Right now this is all speculation as no plan has been put before Congress for a vote, and there has not even been a detailed description of what the administration has in mind. In many respects, this is still playing to the crowds and the supporters, and we will have to wait for the first concrete proposals.

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