Tariffs to the South

By: Dr. M. Ray Perryman
Published in syndication June 05, 2019

President Trump has threatened to impose 5% tariffs on all goods from Mexico on June 10 if Mexico does not take action to slow the number of immigrants at the border. As I am writing, he has vowed to continue to escalate the levies to 25%, Mexico has threatened to retaliate, and Congress has announced that it will stop them with enough votes to override a veto. Who knows what the status will be when you are reading this? Even if the situation is resolved, the threat of such action increases uncertainty and makes it more difficult to finalize a replacement for the North American Free Trade Agreement. If the tariffs actually go into effect and are maintained, it would cost hundreds of thousands of US jobs.

Mexico recently passed China (at least temporarily) to become our largest trading partner, and the US and Mexican economies are highly integrated. Cross-border supply chains are common, taking advantage of comparative strengths in both nations to produce goods which are successful in global markets. Tariffs reduce competitiveness.

Tariffs also cause costs to rise substantially. While tariffs are collected at the border, they are largely passed on to consumers and producers. A certain portion would also be absorbed by offsetting price reductions in response to market conditions.

After adjusting for likely price responses across the spectrum of goods the US imports from Mexico and substitution, we estimate that the proposed tariffs would lead to an increase in direct costs of about $28.1 billion each year. These additional costs would work their way through the economy, and when multiplier effects are considered, the net losses to the US for every year a 5% tariff is in place would include an estimated $41.5 billion in gross domestic product and overall job losses of about 406,000.

Texas would bear the lion's share of this loss given the extensive commerce that occurs between the state and Mexico. We estimate that the proposed 5% tariffs would result in additional direct costs of $8.7 billion per year. These higher costs would lead to losses to the Texas economy of almost $11.9 billion in gross product and 117,335 jobs.

If Mexico retaliates and imposes tariffs on the US, which is probable, the negative effects would be even greater. If the US tariff exceeds 5%, it's even worse. Beyond tariffs are potential changes in investment patterns, supply chains, and strategic plans. In total, the potential harm from tariffs on imports from Mexico encompasses tens of billions in gross product and hundreds of thousands of jobs, but the fallout could be much greater over time. Even talking about it chills trade and investment. Much is at stake for both nations.