President Trump is wasting no time functioning as his own secretaries of Commerce and Treasury, engaging with Mexico to end NAFTA. He has made it clear that he is going to make it untenable for U.S. companies to build manufacturing plants and produce goods in Mexico and import them to the U.S. via tariffs.
Mexican labor can be acquired cheaper than U.S. labor giving production in Mexico a significant cost advantage. Toyota said that if the 40 percent of parts coming from Mexico that goes into autos they make in America had a 35 percent tariff placed on them, it would increase the cost of the autos $1,000 vehicle.
They will pass that cost onto consumers depressing U.S. demand for new autos.
It is a similar cost structure for other industries. The inability of Walmart supply chains to source global low-cost products without counterbalancing tariffs will have a dramatic effect on U.S. consumer costs of living. Some would call that inflation, but it is essentially a tax that U.S. consumers have to pay because our new president is a protectionist.
I call it the bad kind of inflation. You need a little inflation to keep the economic blood moving, but that inflation best comes from the economy doing so well that the demand creates inflation.
A $1,000 per vehicle protectionist tax on a car is not growth driven inflation.
The use of protectionism to create jobs has historically been a failure as a job growth engine. Besides the vinegar, the President is promising some honey for companies who build things here in the U.S … lower taxes, reduced regulation and his good will.
Here is a general synopsis of what I see happening with Mexico: NAFTA as we knew it was dead on arrival with the Trump administration. Mexico has no leverage that will work on Trump. He is going to call the shots. They can complain and pushback, but it will make little difference.
Mexican President Pena Nieto has a 12 percent political approval rating that is probably not going to get a lot better and the odds of some left wing nut being elected president of Mexico in 2018 becomes likely, destroying our current positive relationship with the Mexican government.
Industrial growth in Mexico will stall and reverse with unemployment surging as a result of U.S. protectionism. Mexico will get nothing, but woes from nixing NAFTA.
Donald will need to get his wall built fast before the next wave of Mexicans, as a result of job loss in Mexico, desperate to find work, rush the border to get ahead of the construction.
Illegal immigration from Mexico had slowed to a net zero condition because there were jobs being created in Mexico reducing the incentive to come to the U.S.
Eventually the disparate labor costs between the U.S. and Mexico would have narrowed, but Donald is not going to wait that long for economics to work to solve these problems.
Mexico’s economy will tank and the social and political structure inside Mexico will become less stable likely creating a security risk on our southern border worse than exists now. Trump says that Mexico is going to pay for the wall to which they respond with the F-word.
They may not pay it voluntarily, but Trump can make them pay for it involuntarily by taxing remittances sent from the U.S. to Mexico. Mexicans in the U.S. send something like $25 billion earned here in the U.S. annually, home which constitutes a portion of their social support net in Mexico. Some have compared it to private social security.
That is more than $700 per Mexican annually. Tax those wire transfers 15 percent and they pay for the wall in three to four years. I suppose they can claim that they didn’t pay for the wall, but neither would we. The black market for transferring money from the U.S. to Mexico would get developed.
An influx in illegal immigration spurred by Trump’s economic policy will result in heightened deportation efforts that far exceed returning “criminals.” The deportation effort is likely to disrupt the farm labor force which has employed these people.
There will be a crackdown on U.S. employers making criminals of honest American businesses. We would be deporting more people to Mexico when job opportunities no longer exist there.
Trump thinks that it was 3 to 5 million Hispanics voting illegally in the election that cost him the popular vote. That is insanity, but would darkly color his opinion of immigration and trade policy with Mexico.
Mexican disposable income will contract, GDP will slow, and not only will exports from Mexico to the U.S. decline as a result of new protectionist barriers, but they will have no money to buy from us. Mexico is currently our No.1 corn and pork export destination, our No.2 beef buyer and No. 3 soybean buyer.
The value of their currency has plunged and will decline further reducing their purchasing power to buy U.S. goods.
Good will between Mexico and the U.S. will be severely tested and they will seek new sources of supply to buy what they must buy.
Mexico’s tourist industry is at risk to the degree that they can tolerate American tourists after Trump tanks their general economy.
So far, I am told that it is just a few angry t-shirts, but that can change. Some people seem to think that it is easy to end NAFTA, add a few tariffs and U.S. jobs will blossom.
That is a shallow understanding of all the ramifications of what is being set in motion.
It is no longer conjecture of what President Trump might or might not do. The engagement has begun.
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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