Mexico and the U.S. ag sector are aligned as to trade interests. The U.S. ag sector derives about 20 percent of its net farm income from exports, and exports are often the tip of the sword relative to price discovery for many ag markets.
About 20 percent of Mexican GDP is derived from exports to the U.S. from which they receive their income to be the No.1 U.S. corn and pork buyer and No. 2 U.S. beef buyer and No. 3 largest U.S. soybean buyer.
Mexico accounts for about 13 percent of U.S. exports and imports, but the U.S. exports to Mexico are heavily concentrated in ag commodities.
The growth in U.S. ag exports to Mexico has been supported by the growth in the Mexican economy. A trade confrontation with Mexico as forewarned by President-elect Trump would cause a recession in the Mexican economy that would undermine demand for U.S. ag products.
Trump has threatened a 35 percent tariff on all Mexican imports. That is not likely the first act that will be taken as it would cause a crisis in the Mexican economy. The first move will be a request to eliminate what the Trump team has called, “a one-sided backdoor tariff through value added tax.”
Capital Economics explained, “Mexican firms can claim a credit for VAT on goods exported to the U.S. But it is nonsensical to claim this amounts to a trade barrier because in both Mexico and the U.S., firms compete on a level playing field.
Mexican firms also pay VAT on products sold in Mexico on this score. After all, some 160 countries around the world apply a VAT in the same way.”
Moneycnn.com explained further, “It is true that Mexico has a 16 percent VAT that American companies must pay in Mexico. It’s also true that Mexican companies don’t pay a VAT tax in the United States.
“However, Mexican companies do pay the same VAT tax in Mexico that U.S. companies pay. Trade experts say the VAT isn’t a trade barrier, or tariff, because local companies are paying the same tax in their home country.”
Alan Deardorff, an economics professor at the University of Michigan, said, “Trump was implying that it’s a trade barrier, and it’s just not. Trump’s comment was incredibly misleading.”
What we have learned is that things don’t have to make sense as long as long as there is an “America first” result.
Mexico is unlikely to meet all of the Trump team’s demands which will prompt them to give notice to end NAFTA. One caveat that many underestimated is the power of the president to take trade actions on his own without the direction or approval of Congress.
Much tariff power is in the hands of the President. Nixon, Reagan, Bush and Obama all imposed targeted tariffs on goods ranging from motorcycles to tires.
Nixon imposed a 10 percent tariff on everything to which our trade partners responded by strengthening their currencies which defeated the tariff. Mexico has let the peso devalue 10 percent which works against U.S. exporters before Trump is even in office.
This currency bonus would theoretically encourage U.S. tourists traveling to Mexico for winter hiatus. However, there is likely going to be some angry sentiment toward the U.S. from Mexicans that will create some safety concerns for U.S. tourists if the tension ramps up early in 2017.
This will harm another major source of Mexican revenue from tourism. I know of someone who looked at a trip to Mexico next March that opted for the Dominican Republic instead because of concern over the aforementioned.
Some of the trade actions that Trump threatened during the campaign violate WTO rules. Trump would have the power to withdraw the U.S. from the WTO if he wanted, but that would cause a full blown global trade war the likes not seen since Smoot-Hawley. Trump likes to play with fire, but usually doesn’t jump into fires if he can avoid it.
Then again we don’t know for sure yet what a President Trump would do. One way or another we can expect NAFTA to be revised in a manner that which makes Trump looks great to the blue collar workers that elected him. He never promised farmers a thing about exports.
The notice to end NAFTA will put Mexico under great pressure to achieve a negotiated settlement. Trump will also find some way to generate a revenue stream from his deal with Mexico that he can claim as a means to fund constructing of a wall on the border.
The rush of illegal immigrants crossing the border from Mexico has abated to a net sum near zero. While net immigration from Mexico has currently shriveled to a trickle, when the Mexican economy goes into recession or worse, the impetus to come to the U.S. to find jobs will produce a new wave of immigrants providing a challenge to border security again.
The primary reason that illegal immigration through Mexico moderated was that there were jobs on their side of the border.
Many ag industries and farm groups have been trying to get their points across to the Trump team. The AFBF has communicated that an “enforcement-only policy poses certain concerns for the agriculture industry.
The Farm Bureau has conducted studies that found that an enforcement-only approach would cause agricultural production to fall and food prices to rise. Farm Bureau has been working to educate members and the new administration during the campaign that an enforcement approach needs to understand the economic needs of agriculture and not be done on the backs of farmers.
What should be noted in all of this is how connected everything is and that if a ball is pushed off the hill there is no telling who will get run over.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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