(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.)