The Progressive Ensign

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Category: Trade

Farmers First Casualties of Trump Trade War

 

Photo: geneticliteracyproject.org

The financial mainstream media focus on policy declarations from White House policy spin masters like Larry Kudlow, Chief Economic Adviser to the President saying of the trade war, “it is trade dispute among family members.”  Meantime, American farmer family incomes are being sacrificed as the first casualties of the trade war.

Sources: Bloomberg, U.S. Department of Agriculture, The Wall Street Journal, The Daily Shot – 7/6/18

As Net Farmer Income drops along with the price of soybeans, the Chinese are cancelling their contracts with U.S. farmers and buying soybeans from Brazil and other suppliers like Russia.

Sources: China National Grain and Otis Information Center – 7/5/18

Sources: Bloomberg, China Customs – 5/18/18

It is a basic business reality that when customers go to other suppliers and secure contracts if the customer is pleased with the quality of new products they will stay with the new supplier.  Our farmers are being cut out of business they have been building for decades, and now their livelihoods are being sacrificed to charge on in a lose-lose Trump Trade War (TTW).  In the future, it will be difficult to impossible to get back much of the business farmers are losing as new suppliers become the incumbent.

Next Steps:

We need to stop being complacent about the costs and sacrifices of TTW, there are real costs being borne by farmers, businessmen and their families.  We agree with 1100 economists who sent a letter to POTUS imploring him not to use tariffs as a mechanism for trade dispute negotiation and resolution.  There is no evidence of trade wars solving trade issues, except for damaging the economies of all those countries involved, and in the case of the Depression setting the stage for WWII. The fact that the GOP Administration is minimizing the damage from their no strategy tariff program, is alarming and needs to stop.  Farmers did not ask to be sacrificed for the TTW, and all the other businesses and families being hurt by this disastrous trade policy. They need our support by making our concerns known to the White House and Congress.  We agree with Prime Minister Merkel who stated last week in regard to auto tariffs being renegotiated that any discussions should be pursued via the World Trade Organization in fairness to all parties.  For over 40 years the United States has supported building the WTO and using trade treaties to open doors for American businesses, now is not the time to use bullying, intimidation and threats as tactics for solving economic issues.

The President Thinks Insulting Canada Will Help – The Facts On US – Canada Trade

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab.)

Image: Feedstuffs.com

Last weekend, POTUS has shifted tactics from ‘whack a mole’ to ‘whack a friend’ on trade when he declared in a tweet after the G-6 + 1 summit that Canadian Premier Justin Trudeau had betrayed the US:

“Based on Justin’s false statements at his news conference, and the fact that Canada is charging massive Tariffs to our U.S. farmers, workers and companies, I have instructed our U.S. Reps not to endorse the Communique as we look at Tariffs on automobiles flooding the U.S. Market!”  He continued in another tweet one minute later said of Trudeau’s comment, “US Tariffs were kind of insulting” and he “will not be pushed around.” Very dishonest & weak. Our Tariffs are in response to his of 270% on dairy!”

So, why is the President going after Canada anyway?  Canada, our long time neighbor to the north, ally during WWII, and trade partner that we actually have a trade surplus.  Yes, our trade with Canada is at a surplus of $8.4 billion in 2017, according to the New York Times, when services are added as shown below:

Sources: US Census Bureau, IFF, The Wall Street Journal, The Daily Shot – 6/12/18

Canada and the US have over $693 billion of commerce between the two countries and nine million American jobs depend on trade with Canada.

In the past year, the President has picked on Canada slapping tariffs on softwood lumber causing lumber prices in the US to soar, because the US imports 96 % of the lumber it needs mostly in residential housing from Canada.  POTUS has taken aim at Canada recently to include the country in the tariffs of 25 % on steel and 10 % on aluminum. Over the weekend he focused on dairy in as his tweet noted above about Canadian “270 % tariffs on dairy”.

So, let’s look at that 270 % tariff figure, the US actually has a 2:1 surplus in diary products trade with Canada:

Sources: Bloomberg, Statistics Canada – 6/11/18

The reason there is a 270 % tariff on dairy powder is a system of supply management that was agreed upon by the US and Canada.  For most dairy products sold within the quota of US imports into Canada a tariff of 7.5 % is applied by the Canadian government.  When imports exceed the supply management quotas, super charges go into effect on products like dairy powder or over quota milk at 241 %.  Canada has established a supply management system with the US on dairy products, as most countries including the US subsidize their dairy industry.

Next Steps:

First, our President needs to treat our long-time ally to the north as an ally and friend to the American people with respect, dignity and cordial public discourse.  Privately, he may have disagreements, and negotiations should proceed to overcome trade imbalances where appropriate and to protect American jobs.

Second, the facts need to be used, not falsehoods as POTUS admitted in his first meeting with Trudeau, that he made up the idea there was an imbalance or equality or he didn’t know.  It is time to do the homework, research the facts in our relationship, preserve the on-going huge amount of commerce we already do, and figure out how to work more closely together as partners not adversaries.

Protectionist Policies Are Damaging the Mexican Economy and US Businesses Today!

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab.)

Image: hurd.us.gov

Last Friday, POTUS announced that he was considering just dropping the NAFTA agreement.  His announcement sent the Mexican Stock Market racing down with the fall continuing today:

Source: Patrick Hill, The Progressive Ensign – 6/5/2018

When President Trump was elected in November of 2016, the Mexican market tumbled, then regained when it seemed the Administration would negotiate in good faith.  Then, late 2017 threats and bullying started with the latest swoon when POTUS wanted to just pull out of the agreement.

The administration continues to use a ‘whack a mole’ policy approach, even with Vice President Pence suggesting last week that the NAFTA agreement should be renegotiated every 5 years.  Trade agreements are complex, legal documents which business leaders, consumers and government policy makers depend upon in making economic, infrastructure and industry plans for 10 to 20 years into the future.  Corporations when they plan for building a manufacturing plan, are looking at government trade policies and trends over the next 10 years to determine whether a plant will be profitable or not.  Policy makers can’t be changing the rules of the economic game constantly.

We are concerned that the anti-Mexico trade policies of the administration will continue to cause uncertainty, chaos and severe trade constraints driving the Mexican economy into a recession or worse.  Mexico is the second largest trading partner for the US.  States like California and Texas depend on exports to Mexico and will be hurt if the Mexican economy continues to slide:

Sources: US Census Bureau, Reuters, The Wall Street Journal, The Daily Shot – 5/4/18

Mexico just announced today their first shot across the economic bow of the US.  Slapping tariffs totaling $3 billion on whiskey, cheese, pork and other products. A spokesman for the trade group Farmers for Free Trade commented on ongoing trade war economic missiles being hurled at each other, declaring that the new tariffs would have disastrous consequences for farmers, “Hog, apple, potato and dairy farmers are among those suddenly facing a 10 or 20 percent tax hike on the exports they depend of for their livelihoods. Farmers need certainty and open markets to make ends meet. Right now they are getting chaos and protectionism.” Larry Kudlow, the President’s chief economic advisor shared the latest negotiating strategy for NAFTA on Fox and Friends, taking a strong protectionist stand against a three nation agreement, ‘preference now, and he asked me to convey this, is to actually negotiate with Mexico and Canada separately.”

Next Steps:

We know from research that when the Mexican economy does better, immigration from our south of the border neighbor goes down.

Sources: Five Thirty Eight, PEW Research, The World Bank – 2/28/17

The GOP administrations needs to start treating Mexico with dignity, respect and partnership – which they have earned as our southern neighbor and ally. When the Mexican people are prospering, they don’t seek jobs in the US.  So, instead of withdrawing support for NAFTA which our farmers and other businesses throughout the US are profiting by, focus on the main issue which is the imbalance in autos, trucks, automotive parts and manufacturing as the chart below describes:

Sources: US Census Bureau, The Wall Street Journal – 6/2018

Let’s start using evidence, facts and real insights in negotiating our agreements with our allies instead of bullying, prejudice and smear tactics. We recommended over a year ago, that the Administration, focus on the automative industry imbalance, and protect worker jobs and US businesses:

  1. Tax companies that move jobs to other countries. For example, a company moves a $1 billion plant with a 1000 workers offshore, they pay a 10 % plant offshore tax or $100M, and $20k per worker or $20M penalty to be used for training and apprenticeship programs in the US. (Tax the action we don’t want.)
  1. Establish worker councils in corporations to make decisions jointly, ensuring apprentice and new job training programs are in place.
  1. Offer incentives to keep plants here including fed, state, and local tax reductions, and training programs implemented in local universities and colleges.
  2. Train US workers on advanced assembly and use of robotics in manufacturing to build increased productivity capability and reduce costs.

POTUS Employs ‘Whack a Mole” Trade Tactics Launching the Trump Trade War (TTW)

 

Image: danbyink.bangordailynews.com

After declaring two weeks ago a trade truce with China, POTUS declared last week that 25 % tariffs would be imposed on $50 billion of Chinese of Chinese goods if they don’t commitment to purchases of US energy and agriculture products.  Commerce Secretary, Wilbur Ross left China on Sunday with no real progress except to make the Chinese angry, confused and upset.

The bullying, intimidation, zero sum negotiating tactics may work in the rough and tumble of New York real estate but not international trade where over 70 years of careful negotiations by all the major trading partners have put into place a trading platform with rules and fairness wherever possible.  Now it is true that some nations take advantage of the slow, ponderous and confusing decision making of the World Trade Organization.  But blowing up the present trade agreements by saying things like Vice President Pence said last week to Canada and Mexico that the NAFTA agreement should be revisited every five years is insulting, duplicitous and lacking in good faith.  So last Friday, to heap more chaos on the NAFTA negotiations POTUS says he is thinking of just pulling out of NAFTA completely.  Welcome to a POTUS caused trade war, we call The Trump Trade War (TTW), as history books will likely record.

Prime Minister Trudeau of Canada has condemned the way the US administration has been treating a valued partner calling the actions “frankly insulting”, and in return he receives more trumped (pun intended) up national threats.  He continued in an NBC interview:

“The idea that the Canadian steel that’s in military, military vehicles in the United States, the Canadian aluminum that makes your, your fighter jets is somehow now a threat?” Trudeau declared. “Our soldiers who had fought and died together on the beaches of World War II… and the mountains of Afghanistan, and have stood shoulder to shoulder in some of the most difficult places in the world, that are always there for each other, somehow — this is insulting to them.”  Maybe our POTUS doesn’t understand that dying for a common cause is a higher value than provoking, bullying and intimidation to make an extra short term buck.

EU ministers are confused and upset at being grouped in with China in steel and aluminum tariffs.  The United Kingdom, France, Germany, Mexico, Canada, Turkey and Japan have either announced or launched retaliatory tariffs on US goods and are reviving trading alliances that the US has abandoned like the TTP (Trans Pacific Partnership).

Sources: The Wall Street Journal, The Daily Shot – 6/4/18

The TPP non – US nations are in a dialog with China who is excited about filling the role the US once occupied. Experts note the long term effects and loss in business for the U.S., Adam Posen, president of the Peterson Institute for International Economics observed, “It will be hard to establish trust in the U.S. again, and all the uncertainty will drive down investment and productivity.”

US businesses are busy trying to minimize the damage to their export revenue streams,. Farmers in the midwest have already found that China has cancelled some sorghum shipments causing ships to be turned back, as the Chinese are making deals with Russia for agricultural goods.  American businesses are being cut out of customer contracts now, resulting in lost business that will be extremely difficult to get back once new suppliers are in place. Still incredibly, the White House trade team blows up the present world-wide trade framework replacing it with nothing, which results in uncontrolled reprisals and chaos. Seems like economic missiles have been launched and attacked nations are sending economic missiles back (sounds like a trade war to us, the TTW (Trump Trade War).

Next Steps:

To begin, our political leaders need to stop being invisible as the world trade fabric unravels. Next Congressional leaders need to bring all key trade factions, business and trade representatives and develop an alternative to the destructive protectionist policy now being implemented.  Sound trade policy based on win – win negotiations, fair agreements, protections for labor, working within the WTO, and legal order will win over allies and concessions from adversaries.  The GOP administration needs to stop going it alone, and work with our allies, build consensus, and make improvements in the present painstakingly developed agreements over the past 70 years. Over 1100 economists, the US Chamber of Commerce and world leaders have condemned the declared TTW which needs to end now.

US Washer Manufacturers Raise Prices Due To Tariffs

 

Photo: consumerreports.org

As we predicted one result of import taxes (blog of January 24) the Administration placed on imported washers was that domestic suppliers would raise prices.  Sure enough they have raised prices by 7 – 15 % at a time when consumers are squeezed.  As tariffs were placed on imports we forecasted that domestic manufacturers would take advantage of the higher competition prices and raise their prices as Maytag and Whirlpool have done. Their spokesman say they had to raise prices due to increasing costs of steel and aluminum yet they have raised prices before the steel tariffs went into effect. Once again corporations lobbied government to change the rules in their favor to make more profits while consumers lose.

Other manufacturers for processed goods, food and items with a high shipping cost are raising prices as well.

Sources: Labor Department, The Wall Street Journal – 5/9/18

Of major concern is a combination of higher interest rates, tariffs and competition will cause increases in producer prices that companies will not be able to pass along to consumers. Consumers are too indebted to accept the price increases.  Margins are squeezed, companies lose sales, and a recession begins. Possibly the wealthy can continue to purchase major appliances and processed items but the middle class will not.

Next Steps –

The middle class is caught in the cross fire of competing interests in our economy where the Federal Reserve did keep interest rates artificially low increasing the value of financial assets like stocks, homes and consumers were able take on too much debt. The real assistance would be for the federal government to invest in jobs training, career development, Heartland regional economies, African American and Hispanic community development, welcome immigrants, and end stock buybacks.  Corporations could allocate the $1 trillion in cash they are holding in accounts mostly overseas and invest in their employees – raising their wages, productivity research, decent family leave programs and giving them more voice in corporate decision making.

1100 Economists Predict Trade War Disaster

 

Image: knowledge.wharton.upenn.edu

The economist group letter to President Trump quotes passages from a 1930 letter that was ignored by government leaders at the time leading to a trade war and the Great Depression, many economists believe.

“Much has changed since 1930 — for example, trade is now significantly more important to our economy — but the fundamental economic principles as explained at the time have not”, the economists declared including last year’s Nobel winner Richard Thaler and former George H.W. Bush economic advisor Gregory Mankiw.   Economists in 1930 advised against the Smoot – Hawley act at the time causing a trade war and a disastrous economic downturn for all Americans.

The trade war with China has already begun as we noted in our April 23rd blog the Chinese have not stood back waiting, they placed at 179 % tariff on sorghum shipped from the US causing China bound ships to reverse course.  Soybean orders have been cut way back by the Chinese as well:

Sources: Bloomberg, The Wall Street Journal, The Daily Shot – 5/7/18

Corn contracts are in jeopardy as well in the Midwest as the Chinese threaten tariffs on those crops as well.  Corn farmers are already facing increased competition from Brazil and other countries undercutting their prices.

The reality is the Trump Trade War is on!  Companies and nations are already acting on the threats and in some cases the implemented tariffs that the present Administration has in a misguided manner put in place.

We do not understand why the White House is ignoring the lessons of history, their own constituents in the Farm Belt and 1100 economists in implementing a catastrophic policy that will hurt every American’s pocketbook and many of our foreign allies.

Next Steps:

Our blog on April 2nd outlined two distinct factors that the Administration policy makers need to take into consideration:

First, we need to understand how corporations, suppliers and customers respond to political uncertainty.  Corporations either buyer or seller are seeking certainty around first of all selling their products and second at the highest price.  Second, when our government starts picking winners and losers in the US economy and linking unconnected segments like sacrificing US agriculture for intellectual property theft by China from US high technology companies – then any economic shot is fair game.  Just the threat of tariffs on certain goods is enough to cause customers, in this case Chinese buyers of US agriculture goods to find other lower cost suppliers.  Once these buyers discover new suppliers with lower prices and similar quality they are likely not to switch back to US suppliers.  Sales for US agriculture companies are likely to drop as a result.”

The solution is in working within the international frameworks of the WTO and our agreements with other nations to peacefully solve these economic issues. Sound economic policy is based on win-win agreements that put in place long term relationships that both sides can build their economic futures on. Plus, these are complex integrated trade issues and cannot be settled by blunt, prejudiced based ideas that history has proven are false.

Trade War Heats Up – China Slaps 179 % Tariff on US Sorghum

 

Image: asissentinel.com

Two grain ships filled with sorghum grain reversed course or headed to new destinations as China announced last week that they would require a 179 % deposit on the commodity.

Image: The Ship RB Eden Turning – Bloomberg – 4/20/18

US farmers shipped about $1 billion per year over the past two years of sorghum to China according to the Wall Street Journal. China is specifically targeting Trump states to make the point that a tit for tat trade war will end badly for US producers.

As other countries mount their own tariffs to US goods, and the US slaps tariffs on imported goods prices will go up.  When prices go up, inflation increases causing interest rates to rise, which means that interest rates rise on credit cards to mortgages.  Every consumer has some debt and the inflation wave will crash through the US financial system, ending the 2nd longest economic growth period since WWII – though the economy has helped the top 20 % the most versus the 80 % in the working class.

Next steps:

As we have noted previously, business leaders are already making decisions and calculations like turning ships around.  The Administration’s announcement and follow through on steel aluminum and lumber have distorted markets artificially causing increased prices and supply disruptions. Our leaders need to stop this bullying approach toward our trade partners, use international forums and work within our trade alliances to settle trade issues. Starting a trade war will cause everyone to lose money, jobs and trigger an economic downturn. The working class will be hurt the most, as they have the least amount of money saved and are usually the first to be fired in any falling economy.

Corporations Are Making Decisions Now in Midst of Trade Uncertainty

 

Image: mikaeldacosta.com

Our President just threw the trade dialog for a loop this afternoon requesting his trade team come up with another $100 billion in tariffs against China on top of the already $50 billion he has announced.  He thinks that by starting a verbal trade war with a protracted ‘up to 6 months’ negotiation with China and other countries that the US economy will come out the winner.  The winning outcome will likely never happen! Why?  Because corporate leaders are already factoring in an incredibly slow negotiation.  Corporations abhor uncertainty, the policy uncertainty index with this President is off the charts.  Executives are making decisions on investments for the next 3 – 5 sometimes 10 years out into the future.

Source: Factset, Stanford, Northwestern, University of Chicago, The Wall Street Journal 4/4/18

Professors Baker of Northwestern, Bloom of Stanford, and Davis of University of Chicago developed an uncertainty index based on mentions of ‘certainty’ and ‘uncertainty’ in newspaper articles.  With a relatively quiet economy and the first 12 months of President Trump’s administration now behind us, we expect the ‘uncertainty’ mentions to soar with trade war, stock market prices falling and cross industry conflicts about which industry should be sacrificed for another one.

The major stock indexes have fallen as much as 10 % year to date and yesterday, the Dow Jones Average was on a roller coaster down as much as 510 points then closing at 210 points up at the close.  Money managers hate uncertainty too, as they need to make daily decisions in regard to investments of millions of dollars in trusted to them to grow for retirement programs, trusts, endowments and investors looking out 5 and 10 years.

The present trade war was started by our President because he said it would be ‘easy to win.’ Yet, he has little experience in complex global product and services trade.   Treaties that he is ready to tear up took years to negotiate, analyze the complex trade data and gain buy in from all parties.

Executives are looking at data, researching alternatives, hiring consulting firms and looking to figure out a long term plan now – with alternatives if the trade war is won by the US or if it is lost by the US or their industry.  They will make decisions based on the present level of ‘uncertainty’ and see alternatives now, not waiting to see the outcome.  Business leaders cannot wait, they have businesses to run today, shareholders to report to, employees to manage, and products or services to build and sell.

In the steel sector, companies in the US are already stockpiling steel before the tariffs on imports start, spiking prices then there will be a glut of product with prices falling.  Soybean farmers in the US already reeling from competition from Brazil and other countries will feel the immediate fall of sales from China, as Chinese customers seek lower cost ‘safe’ non US suppliers for products like pork.  Pork futures prices that farmers use to price their hog products have already dropped 15 % in the last month and a deep spiral down of 2.58 % today. Prices are already dropping customers and suppliers are making decisions to reduce uncertainty and these decisions will cause market chaos leading to a recession or worse.

Next Step:

We need to wind down the brinksmanship now, focus on the real issues behind trade imbalances that have been developing for decades, and confront intellectual property theft on a straight on policy basis not through tariffs. We need to use the international forums like the WTO that have been carefully built over the past 50 years to ensure prosperity across the world for all economies and at the same time protect US worker jobs, incomes and future career opportunities.  We have said in previous posts that the time is now to reverse direction before it is too late and the global economy is severely damaged.

China Retaliates in Trump Trade Battle

 

Image: asiafinancialpublishing.com

China announced yesterday they will be placing tariffs on 128 American goods for a total of $3 billion dollars in response to the Trump administration tariffs of 25 % on steel and 10 % on aluminum.  The situation is posed to escalate as the President is expected to announce $60 billion of new tariffs on Chinese imports this week.

The US agriculture industry is reeling from increased competition from overseas countries like Brazil and now the administration is throwing a trade war into the mix.  Farmers are perplexed as to how to navigate these new trade waters.

Source: US Department of Agriculture, The Wall Street Journal – 4/2/18

The US agriculture industry is one of the bright spots in US exports accounting for $140.5 billion in exports for 2017 according to the US Department of Agriculture.  China receives about $22 billion of US exports last year in pork, and meat products.  While the $3 billion in tariffs is not large it maybe just an opening round in the economic shots being fired by the US and China.

While some industry analysts look at just the dollar amounts involved we see a very disturbing trend in the tenor of the conduct of this trade conflict.  This administration has distinguished itself by being bullying, intimidating, impulsive, vengeful and unpredictable – not good traits for a positive trade negotiation outcome.

Next Steps:

First, we need to understand how corporations, suppliers and customers respond to political uncertainty.  Corporations either buyer or seller are seeking certainty around first of all selling their products and second at the highest price.  Second, when our government starts picking winners and losers in the US economy and linking unconnected segments like sacrificing US agriculture for intellectual property theft by China from US high technology companies – then any economic shot is fair game.  Just the threat of tariffs on certain goods is enough to cause customers, in this case Chinese buyers of US agriculture goods to find other lower cost suppliers.  Once these buyers discover new suppliers with lower prices and similar quality they are likely not to switch back to US suppliers.  Sales for US agriculture companies are likely to drop as a result.

We have said in our Insight Byte of March 6th that starting a trade war linking disconnected parts of the economy, not using international bodies like the World Trade Organization will just lead to lose – lose economics for global corporations and consumers.  Lost jobs will result, economic recession or depression will spiral downward and it will take years to recover.  Sound, research based trade policies based on win-win partnerships are the only way to turn this situation around.  This administration has opened an economic Pandora’s box that it will not be able to close.

Threatening Mexico Will Lead to Loss of American Jobs – Let’s Build Bridges Not Walls

(Editor Note: This is the third in a series of posts examining the polices of the new GOP administration.)

The View:

In the past week there has been a series of threatening tweets from POTUS45 to President Nieto telling him that if the trade imbalance is not fixed he will impose a 20 % tariff on all imports from Mexico.  In a vacuum it may seem  like this would save US jobs.  Yet, the facts are that the US depends on Mexico to purchase $235 billion of exports each year. Damaging the Mexican economy will cause a loss of jobs and purchasing capacity by Mexican workers leading the loss of US jobs.  The solution is to tax those actions we don’t want like manufacturing plants and jobs being moved to Mexico and offering incentives to companies to hire and keep workers here for advanced manufacturing and automation.

The Story:

We need a win-win trade relationship with our southern neighbor.  The number of illegal immigrants in the US has dropped to an all-time low of 10.9 million based on an analysis by Robert Warren at the Center for Migration Studies of US Census Bureau data.  Also, his study shows that immigration by Mexicans to the US has dropped by 7 % over the past few years while immigration has increased by 5 % from Central American countries.  Experts believe one factor in the reduction of immigration is the improved Mexican economy providing better wages for Mexican workers. In a recent interview with the Wall Street Journal a worker describes how his life has changed:

“Alexander Calderón, 46, grew up the son of a farmer in a rural part of the Mexican state of Veracruz. He started working at Metalsa welding frames for Chrysler trucks in 1993, initially earning 600 pesos, or about $194 at the time, per month. He now earns 40,000 pesos, $1,860, per month as a supervisor in the plant’s steel hydroforming division, owns a house in the Monterrey suburb of Guadalupe, and sent his oldest son to study accounting at the state of Nuevo Leon’s public university.

“For me, I really started to notice the development of industries here in the last 15 years as companies from other countries came here. That’s when my salary started to go up,” Mr. Calderón said. “It’s gotten very competitive.”

Mexican workers with good jobs has dramatically reduced their desire to migrate to the US.  Trade reduces crime, and integrates the economies of both countries more closely. For example, before NAFTA cars sold by Mexico had only 5 % US content, today they have 40 %.  When both countries prosper through a productive partnership workers will enjoy a better life. Yes, there has been a loss of US auto industry jobs but a trade war would cost US jobs too.  The Center for Automotive Research estimates that a 35 % tariff on imports would cause a loss of 450,000 car sales, leading to 6700 jobs lost in North America in both the US and Mexico and a loss of 31,000 jobs in US parts supply chain companies.

However, it is estimated that only 18 % of the loss of all US manufacturing jobs has been caused by overseas job placement according to a recent Ball State University study.  82 % of manufacturing job losses are due to automation.  Auto plants in both the US and Mexico are highly automated.

The latest round of tweets between POTUS45 and President Nieto on NAFTA trade has resulted in a standstill and cancellation of their planned meeting next week.  Even though talks are at a standstill the series of US threats has badly damaged the Mexican economy already. As noted in our Economic News section, since November 8th the Mexican Peso has dropped in value against the dollar by 13 % and the Mexican stock market dived by 20 %.

The US exports 50 % of the gasoline that Mexicans purchase. If Mexican companies are hit with a 20 % tariff on exports to the US, Mexican corporate sales to the US will drop.  Mexican firms will be forced to lay off workers. Unemployed Mexican workers will buy less US gasoline. Then, US oil field workers lose their jobs.  Is the tariff policy trading US auto industry jobs for oil worker jobs?

This chart outlines by industry sector the exports and imports between the US and Mexico in 2015 (right click to enlarge the chart under a separate tab):

The largest trade imbalance with Mexico is in auto parts, trucks, buses, cars and crude oil.  The US ships more computer technology, telecom gear, and gasoline to Mexico than we import. Note Mexico is a major oil exporter, shipping oil here for refining into gasoline then piped back to Mexico.  What would a 20 % tariff on Mexican oil do to the US gasoline industry?

Prior to the 1994 NAFTA agreement with Mexico, Mexico ran a trade deficit with the US. Since then Mexican imports to the US have exploded from $65 billion per year to $295 billion in 2016.  While US exports to Mexico have jumped from $68 billion to $235 billion, particularly boosting the economies of the border states like Texas, New Mexico and Arizona. Yet, there is a US trade deficit of $60 billion in 2016. What should the solution be to keep companies investing in the US and saving US manufacturing jobs?

The Solution:

While the NAFTA trade agreement should be reviewed for fairness for both countries and workers, in the meantime taxes and incentives are the preferred approach:

  1. Tax companies that move jobs to other countries. For example, a company moves a $1 billion plant with a 1000 workers offshore, they pay a 10 % plant offshore tax or $100M, and $20k per worker or $20M penalty to be used for training and apprenticeship programs in the US. (Tax the action we don’t want.)
  1. Establish worker councils in corporations to make decisions jointly, ensuring apprentice and new job training programs are in place.
  1. Offer incentives to keep plants here including fed, state, and local tax reductions, and training programs implemented in local universities and colleges.
  1. Train US workers on advanced assembly and use of robotics in manufacturing to build increased productivity capability and reduce costs.

Editor Note: References for this article are under the Research tab in US – Mexican Trade Trends.)

 

 

 

 

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