Friday, April 5, 2019

Good Trump Keeps Border Open While Bad Trump Threatens New Tariffs

Both Good Trump and Bad Trump were on display yesterday as President Trump backed off from his threat to close the Mexican border and simultaneously threatened to add more tariffs to Mexican auto exports to the US. The threat to close the border had sparked fears of a disruption in trade with Mexico that could have led to shortages and price increases on numerous products including avocados.

Addressing reporters at the White House, President Trump said that Mexico was not doing enough to stop cross-border traffic of illegal immigrants and drugs, but that he would give the Mexican government a year to improve.

“We’re going to give them a one-year warning and if the drugs don’t stop, or largely stop, we’re going to put tariffs,” on cars, Trump said. “And if that doesn’t stop the drugs, we close the border.”

When asked if his comments meant that he would not close the border for a year, Mr. Trump answered, “I didn’t say that. We’ll start with the tariffs and see what happens.”

The president did not explain how what he has described as a national emergency at the border could withstand waiting a year to take action.

Trump’s reversal on the threat to close the border was a welcome sign for businesses and economists. After decades of free trade under NAFTA, Mexico ranked as the second-largest export market for American-made goods as well as the second-largest supplier of imported goods to the US per the US Trade Representative. Many corporate supply chains are integrated within both countries with Mexican factories building components for products finished in the United States. Many consumer goods are also imported from Mexico.

Since the president made his threat to close the border, the avocado has become symbolic of the trade with Mexico that would be lost if Mr. Trump follows through. The fruit used in guacamole has become a very popular food in the United States and most of the American supply is imported from Mexico. Some supporters of the president’s strategy argue that avocados are also grown in the US and so the market would not be disrupted if the border was closed.

Several US states do grow avocados. The US produced a total of 292 million pounds of avocados in 2017. Unfortunately for avocado aficionados, Americans consumed about 2.2 billion (with a “b”) pounds of avocados the same year. If avocado imports were cut off from Mexico, the world’s largest producer. The avocado deficit means that the US would certainly suffer a large avocado shortage if supplies from Mexico were cut off.

When a product with high demand is in short supply, the laws of supply and demand take over. Prices increase and demand simultaneously falls. This has already happened as avocado markets reacted to the threat of border closure by increasing avocado prices by 34 percent.

The problem is the same for many other products as for avocados. Cars are one example. Mexico exports more than 2.5 million autos to the US that are produced by almost all major automakers, including popular Ford, Chrysler, and GM models. The application of tariffs or the closure of the border could hit American automakers and consumers hard. It would take years to move production back to the US.

Increasing prices would make it more attractive for American farmers to grow avocados, but the loss of avocado supplies could not be immediately replaced.  As with moving a factory, it takes 3-4 years for newly planted avocado trees to produce fruit. Diverting American farmland to avocado production would also mean that other crops could not be planted, causing shortages of other commodities due to limited resources.

The resources of the Mexican government are also limited. Security forces in the third-world country face a much greater threat from drug cartels than from migrants seeking to make their way to the US border. If the Mexican government gives in to President Trump’s demand to allocate more resources to intercepting and detaining migrants, those resources won’t be battling the cartels and drug smugglers.

While the decision to keep the border open will be welcomed by many Republicans and members of the business community, the president’s threat to step up the tariff war is more problematic. The Trump Administration completed a NAFTA rewrite with Mexico and Canada last year, but the new treaty has yet to be ratified by each country. It is possible that Mexico will refuse to ratify the deal if President Trump continues to threaten new tariffs.

Killing the new version of NAFTA may suit President Trump just fine. Mr. Trump blamed NAFTA for US economic woes on the campaign trail in 2016.  As recently as December, the president threatened to withdraw from NAFTA entirely. Killing the free trade agreement would allow both countries to place tariffs on US goods and could cause an economic shock.

President Trump’s erratic trade policies put the growth of the US economy at risk and work at odds with his regulatory and tax reform. Economic growth surged in the first half of 2018 following the passage of tax reform but slowed to Obama-era levels after the onset of Mr. Trump’s trade war. Growth for the fourth quarter of 2018 was recently revised downward to 2.2 percent, which is below the post-WWII average.

President Trump deserves credit for reversing his decision to close the border, but the reversal merely corrects a self-induced problem that stems from the president’s rash and ill-considered comments of a week earlier. Closing the border would be unlikely to have a significant effect on slowing smuggling and illegal immigration, especially since most new illegals enter the US legally and overstay visas, but it would have a punishing effect on trade and the economy.

If President Trump stands by his threat to close the borde next year, the debate would shift to the runup to the 2020 elections. The issue of a disruption of trade with Mexico could prove to be enough that many business leaders would see the socialist Democrats as less of a threat to the economy than an isolationist Trump Administration.

Originally published on The Resurgent

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