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Mexico tariffs (1)

Don't Mess with Mexico

It seems that the imposition of tariffs has become the administration’s “go to” tool for addressing any policy issues, trade or otherwise.

Last week, the president issued a series of statements. The first, on Twitter, was that that he would impose a “5% tariff on all goods coming into our Country from Mexico,” starting June 10 until Mexico stops immigrants from entering the U.S. illegally. The second was that “those tariffs could rise as high as 25% by October if Mexico doesn’t resolve the illegal immigration issue.” The third was that “Mexico has taken advantage of the United States for decades … making a fortune from the U.S.” and “they can easily fix this problem.”

Many economists and politicians reacted negatively to this threat of tariffs, including members of the president’s own party who have supported his previous actions on the immigration issue. Representative of this opposition was Iowa Sen. Chuck Grassley, who said, “Trade policy and border security are separate issues. This is a misuse of presidential tariff authority and counter to congressional intent.” 

It is true that the standard-of-living for Mexican citizens working in maquiladora plants has risen, but I can assure you none of them has made a fortune. It is also true that Mexico has operated within the guidelines of NAFTA, which define the trade relationship between our two countries, so their trade practices shouldn’t be regarded as “taking advantage of” the U.S. Finally, the ownership of the maquiladora factories is mostly foreign, with the majority of that ownership by U.S. based corporations. So if there is any fortune being made, it is by our country’s own domestic companies.

Mexico is one of the United States’ largest trading partners. Tariffs mean that the goods the U.S. buys from Mexico result in higher prices for U.S. citizens. For instance, on an average pick-up truck built in Mexico, the 5% tariff will result in a price increase of over $2,200. I’m not sure “Joe Public” is going to like that much. And it’s not just finished product. Many of the parts and components that U.S.-owned automobile manufacturers sited in this country are sourced from Mexico. That means the even the price of vehicles assembled in this country will go up noticeably.

Though I support the tariffs on China with some reservations, I think I laid out a pretty good case last time that the threat of tariffs on automobiles imported from Japan and the European Union are not only not needed, but could cause significant negative impact on that industry worldwide, including on U.S. automotive assemblers and their suppliers. I called such a move irresponsible.

Here, I’ll go a step further. These tariffs are not the right tools for addressing our illegal immigration issue. There is no doubt in my mind that if tariffs are applied, they will not reduce the flow of Central American’s illegally crossing Mexico’s southern border and probably result in negative unintended consequences. It certainly won’t help our relationship with Mexico, with whom we have recently renegotiated a trade pact. The proposed tariffs, by the way, do not fall within the parameters of that pact. The tariffs could also likely give pause to other countries that we are currently negotiating new trade agreements with, relative to whether we’ll live up to the commitments we made in those pacts.

It seems that the imposition of tariffs has become the administration’s “go to” tool for addressing any policy issues, trade or otherwise. This is like a when a carpenter has a favorite tool, and elects to use only that tool in the building of a new house. Would you want your house built that way?

Ireland—Really?

You may ask what other tools could be used relative to trade in addition to tariffs. In another story last week, the U.S. has again refrained from labeling China a currency manipulator. Instead, countries such as Ireland have been added to the currency manipulation “watch” list. Hmmm.

There is little disagreement about the Chinese having—over time—used currency manipulation as their “go to” tool for increasing exports.  It seems that the Chinese, now, have started using that tool to address the tariffs that our country has imposed on imports from them. Up to this point, the administration has been pretty firm in taking appropriate actions to address unscrupulous Chinese Trade Practices including putting an embargo on U.S. manufactured components for Huawei—the world’s second largest producer of smart phones and a leader in developing next generation 5G networks—and charging one of their senior executives with a felony and working to extradite her from Canada to the U.S. to face those charges. Based on this it seems an anomaly to give China a pass on their currency manipulations. Go figure.

Fix the Big Problem First

In other news last week, the European Union responded to the administration’s threat of automobile import tariffs and/or quota plan by calling them a “no-go," as well as threatening to respond “in kind” by putting tariffs on U.S. goods, such that this country’s exports to the European Union will be financially impacted to the same extent as they are by our actions on their cars. In other words, there will be tit-for-tat.

I have to wonder whether, even if the U.S. does have legitimate grievances about EU trade practices, it makes more sense to address the primary problem—China—first, rather than try to take on the whole world at once?  I’m pretty sure that should the United States successfully address China’s illicit and illegal actions, other countries in the world would take notice and be more willing to work with us on our trade concerns relative to them.

Finally, China seems to have backed away from the commitment it made in February to buy an additional 10 million metric tons of soybeans. In response to this the administration will be providing a second large—$16 billion—relief payout to domestic farmers saying, “this money all comes from China.” I think most people in this country now understand that American consumers, not China, end up paying for tariffs. This is why they should only be applied in a rifle—rather than shotgun—manner.

A final point. I was born in Iowa—farm country—and spent a large part of my career working for a multinational manufacturer of farm equipment, so I understand the financial pain our farmers are experiencing as a result of our trade war with China. If government assistance to the agricultural industry is warranted, why isn’t some sort of relief to the manufacturing sector?

Paul Ericksen is IndustryWeek’s supply chain advisor. He has 38 years of experience in industry, primarily in supply management at two large original equipment manufacturers.

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