Is a Trade War With Mexico Good for US Manufacturing?

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Among the ideas that the Trump administration has mentioned as a way to pay for the planned southern border wall is a 20% tax on all goods coming in from Mexico. Press Secretary Sean Spicer and other administration insiders were quick to point out that this is just one of many ideas (including taxing remittances sent to municipalities from nationals working in the U.S.) being considered for how to get Mexico to pay for the wall that it certainly doesn’t want.

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If President Donald Trump makes good on threats to gut NAFTA and impose stiff tariffs on Mexican goods, economists say he risks a trade war that could lead to the very thing he is hoping to avoid — a huge surge in Mexican migration here to the U.S.

A stiff tariff policy and a wall could very well be catastrophic for the Mexican economy. Recession, a dramatic weakening of the peso, soaring inflation, interest rates and unemployment would only be the start of it.

“Mexico is smaller than the U.S. and can be harmed by conflict more than the U.S. would be,” said Adam Posen to the Associated Press. Posen is president of the Peterson Institute for International Economics, a Washington think tank that supports free trade.

Still, it’s hard to argue that Trump’s talk couldn’t conceivably leave U.S. manufacturers with a better deal with Mexico, precisely because the one they have right now is so, so bad. According to the Office of the U.S. Trade Representative, the U.S. goods and services trade deficit with Mexico was -$49.2 billion in 2015.Mexico is currently our third-largest goods trading partner with $531 billion in total (two way) goods trade in that year, the last for which full figures are available. Goods exports totaled $236 billion; goods imports totaled $295 billion. Is that -$49.2 billion an opportunity? Possibly for both the U.S. and Mexico?

A Mexico-U.S. Deal That Targets China?

Bank of America Corp. chief Mexico and Canada economist, Carlos Capistran, pointed out in a recent report that 90% of the U.S. trade deficit lies outside North America. Bringing together more resources from Mexico and Canada within the NAFTA free-trade zone could help make everyone more competitive and narrow that gap.

It’s not a crazy idea, really, at all. China has played a greater role boosting the U.S. trade deficit than Mexico over time, even without a free-trade agreement. From 1993 to 2015, the gap with China grew by $361 billion versus Mexico’s roughly $49.2 billion. Mexico also buys about twice as much from the U.S. as China does. A Bloomberg article points out that deterring imports from Mexico, in some future negotiation, could give way to mutual export growth for both countries, spurred “by helping to create larger and more innovative companies.”

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Of course, after President Enrique Pena Nieto canceled a trip to Washington to discuss new trade terms after President Trump’s executive order asking for the aforementioned wall… we’re not heading in that direction right now. The best that either side can hope for is that the Trump at the negotiating table is far different than the Trump in campaign mode. As a businessman and a politician it can’t be lost on him that the trade deficit numbers with China are far worse than those with Mexico… and we just might need each other yet.

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