Mexican Stand-Down: The Trump-Mexico Deal
President Trump has threatened to place tariffs to Mexico in another bid to curb rampant illegal immigration from the southern border, and a deal was quickly made between the U.S. and Mexican governments to stop both the tariffs and border-jumping; not yet signed, but likely so. It seems a second trade war win for President Trump is imminent. This article will explore the mindset of Trump, as well as the potential effects of a tariff, and the victims of illegal immigration.
The Circumstances of President Trump
Let me remind you of the situation of President Trump. Candidate Trump ran, in 2016, on the promise of “Build the Wall”, shouting to the crowds of chanting supporters:
“We’re going to build the wall, we have no choice, we have no choice. Build that wall, build that wall, build that wall, [etc]. So, we’re going to build it” (Trump, 2017).
President Trump then failed to get a border wall into the budget in 2018, ultimately giving in during the government shutdown (Restuccia et al., 2018). He then declared a National Emergency on the issue, saying (Baker, 2019):
“We’re going to confront the national security crisis on our southern border, and we’re going to do it one way or another”
President Trump has often used the threat of children being killed by illegal immigrants; the ‘angel moms’, as they are called, as well as the potential threat of hurting labour in the United States (Baker, 2019). With support for him dropping due to not getting enough border work done, Trump began to look for other ways to deal with the immigration problem.
Another curious fact about the United Staes is that the power of placing or lifting tariffs is traditionally one of Congress, not the Executive office, according to the U.S. Constitution. However, this power was given to the President during President F.D. Roosevelt during his process of centralisation (Packard, 2019). This has mostly gone well, but there is a reason why the Constitution gave this power to the Legislature, not the Executive. Firstly, it is the job of the legislature to make law. Secondly, in case a President were going to randomly enact tariffs on political target countries.
And so President Trump has moved from asking Congress for money to solving the problem directly; tariff Mexico, a country dependent on U.S. trade, and make them deal with the issue directly. It is unusual to mix non-economic goals with economic tools (Economist, 2019). This makes Trump look strong to his supporters, and makes Trump look like he is dealing with the Mexico issue. When Trump and President Obrador sign a deal, it will give Trump another thing to brag about during his 2020 campaign run.
And so Donald Trump threatened, at the beginning of June, to place tariffs on Mexico unless Mexico is able to cut the flow of migrants across the U.S.-Mexico border (Economist, 2019). The Mexicans immediately sent a delegation to Washington for talks. Each month would have increased this tariff by 5% each month until 25% at total. The leverage by the U.S. is enormous; the U.S. will not suffer much problems from these tariffs, whereas in the Mexican government would suffer greatly (Economist, 2019).
“Using economic policy as a weapon is becoming a preferred tactic of Mr. Trump” - Simon Long, Economist (2019)
Now, two days before the first tariffs were to hit, a deal was made between Trump and Mexico (BBC, 2019); the U.S. would speed up applications for citizenship, and Mexico would deploy 6,000 troops on the southern U.S. border, as well as tackle human smuggling. The deal is not yet signed, and discussions will continue for 90 days, with threats of further action if a deal is not reached. Shapiro (2019) criticises this deal by claiming that measurements of illegal immigration are difficult, as well as giving them 6 weeks to solve the problem.
The Current Trade Circumstance of Mexico and the U.S.
In May, Canada, U.S., and Mexico had signed a trade deal to remove all tariffs and resume free trade (Office of the United States Trade Representative, 2019b). Donald Trump called the USMCA ‘the greatest trade deal’ (Schiff, 2019). NAFTA was just renegotiated; and immediately a new issue between the U.S. and Mexico has risen, leading to rising concerns about long-term trade with the United States (Economist, 2019). This may have shot down the trade deal he spent time and money negotiating (Schiff, 2019).
U.S.-Mexican trade represents $671 billion in 2018 (Office of the United States Trade Representative, 2019a). The United States has a trade deficit of $72.2 billion in 2019, an increase of 14.9% from the year before; The United States exports $299 billion and Mexico exports $371.9 billion. It is estimated that 1.2 million U.S. jobs are supported by U.S.-Mexican trade (as of 2015) (Office of United States Trade Representative, 2019a).
However, Mexico claims that the United States actually enjoys a $128.5 billion good trade surplus with Mexico; Canada also claims that the United States under-reports the benefits it gains from trade. This is represented by reporting methods of countries trading goods through the U.S. to Mexico, or through Mexico to the U.S.; leading to discrepancies.
Mexican nominal GDP is $2.4 trillion dollars (OECD, 2019c); between both imports and exports, U.S.-Mexican trade represents a quarter of the entire economy of Mexico. Mexico is the third biggest good trades partner with the United States; it is the second biggest goods export market for the United States (Office of the United States Trade Representative, 2019a). The United States is also the second largest market for importing Mexican goods in 2018.
The United States exports mostly agriculture to Mexico. Mexico exports vehicles, electrical machinery, machinery, mineral fuels, and optical and medical instruments (Office of the United States Trade Representative, 2019a).
The United States has increased FDI to Mexico by 8.9% this year; this can be caused by the lessening competitiveness of China, as well as the potential trade and political issues between the U.S. and China. Meanwhile, the U.S. and Mexico share NAFTA, making trade stable (without Trump). Mexico has in turn increased FDI in the U.S. by 4.7% in real estate and manufacturing (Office of the United States Trade Representative, 2019a).
The Effects of Immigration on the U.S.
The United States Commission on Civil Rights in 2010 found increasing numbers of illegal immigrants from Mexico increasing year after year, as well as forming already a third of existing low-wage, low-skill labour. A more recent estimate, 11 million, is given by Borjas (2017)**. We have seen the amount of illegal immigration decrease when Trump was elected, but we can also see a rise in illegal immigration since (BBC, 2019):
Let us consider the educational levels of 25-64 years olds in Mexico are as such (OECD, 2019a):
Below Secondary (Didn’t finish High School or equivalent): 62.3%
Finished Secondary (Finished High School or equivalent): 20.2%
Finished Tertiary (Finished bachelor’s degree or equivalent): 17.4%
From the above, we can state that the majority of the illegal immigrants are likely uneducated, a view supported by both USCCR (2010) and Borjas (2017). The educational levels of 25-64 years olds in the United States are as such (OECD, 2019a):
Below Secondary (Didn’t finish High School or equivalent): 9.4%
Finished Secondary (Finished High School or equivalent): 44.3%
Finished Tertiary (Finished bachelor’s degree or equivalent): 46.4%
From the above, we can see that the U.S. has a lack of low-skilled, low-educated workers. As such, the Mexican immigrants are fulfilling the gap in the labour market. Let us now consider the levels of education among differing racial groups in the United States (United States Census Bureau, 2018). Firstly, having finished High School:
Whites: 25.3% (36.1 million) have only finished High School
Blacks: 29.3% (7.9 million) have only finished High School
Hispanic: 27.8% (9.4 million) have only finished High School
Asian: 18.3% (2.5 million) have only finished High School
From the above, we can see the following. The group most at danger from illegal immigrants are Blacks and Hispanics; not the Whites and certainly not the Asians. Now let us consider university graduates and above in education among differing racial groups in the United States (United States Census Bureau, 2018):
Whites: 38.9% (55 million) have a Bachelor’s degree and above
Blacks: 25.2% (6.6 million) have a Bachelor’s degree and above
Hispanic: 18.4% (6.2 million) have a Bachelor’s degree and above
Asian: 56.5% (7.7 million) have a Bachelor’s degree and above
We can also assume that the more educated you are, the less you are at risk. We can see that it is again, the Blacks and the Hispanics that face the greatest pressure from illegal immigration. Whites and Asians are more educated, and thus more insulated from illegal immigration. You could even make the argument that Whites and Asians benefit more from illegal immigration, as illegal immigrants push down the costs of production, making goods cheaper, in turn allowing Whites and Asians more purchasing power without threatening their jobs.
As such, we find that Blacks and Hispanics are both the most likely to face competition from illegal immigration, as well as the least likely to be educated above the level of illegal immigration. They are the victims of illegal immigration ultimately.
The United States Commission on Civil Rights (USCCR, 2010) places one-third of workers to be illegal immigrants, as well as being both low-skill and low-wage labour, affecting black workers specifically. These are precisely the people affected by illegal immigration. In recessions, it is precisely the legal, low-wage and low-skill labour that is disproportionately affected by illegal immigration. The Federal Reserve have begun for the next recession, so one is likely coming up (Economist, 2019). Schiff (2019) estimates a recession worse than the 2008 Great Recession.
Borjas (2017) found that illegal immigrants wages are far below their legal counterparts, and flat in growth during prime working years.
It is widely agreed by panelists of the USCCR (2010) that illegal immigrants did deflate wages and employment for black workers, although it is not agreed by how much, ranging from modest to significant. That said, wages for this group of workers has deflated to less than a worker 35 years ago (adjusted for inflation).
Borjas (2017) estimates that the deflation of wages due to illegal immigration is modest, as the difference in earnings reduces sharply once other socio-economic differences such as education of the illegal immigrants is taken into account, reducing from around 40% difference to less than 20% difference in hourly wage. If the wages of illegal immigrants are not so much lower than legal low-wage workers, then the advantage of hiring illegal immigrants is not so great. However, the age-earning levels for illegal immigrants are far below that of legal workers (Borjas, 2017).
Being purely undocumented, but all other things the same, Borjas (2017) places the undocumented status as reducing wages from 10% in 2005 to 4% in 2014.
A personal observation is that the rise in illegal immigrant wages may also be due to the Dreamer legislation (DACA), as well as the general acceptance from difference political groups and states to illegal immigrants. If they no longer fear deportation, then the general bargaining power of these workers will increase, leading to these higher wages. Borjas (2017) recognises this idea, but doesn’t believe that the evidence has sufficient support for this yet. I have explored this idea for the United Kingdom here.
There is also the possibility that increasing the wages of these low-skilled jobs would simply lead to those jobs being exported abroad. However, with tariffs being threatened to countries abroad, companies may choose to keep these jobs in America for the sake of simplicity (USCCR, 2010). There is also the argument about whether the United States should worry so much about providing jobs for illegal immigrants, as they are not U.S. citizens and so not under U.S. government care.
There is the argument that the U.S. may wish to keep these jobs, as the flow of money into Mexico will raise the living standards of the Mexicans, as well as their consumption power, which in turn leads to the massive 37% of Mexican GDP imports from America, as well as raising living standards improving the conditions of the Mexican people.
The USCCR (2010) recommends more data to be collected on illegal immigrants. However, this has been flagged as a racist idea by opponents of the current Trump administration (Oprysko, 2019); even if it is an Obama administration idea now carried by the Trump White House.
The Potential Threat of Tariffs
Mexico’s exports 37% of their GDP (compared with imports of 39%) whereas the United States exports 12% of its GDP and imports 15% of its GDP (OECD, 2019b). The U.S. trade relationship with Mexico is described as its most vital (Economist, 2019).
Let’s assume the consumer behaviour doesn’t change*. Trump’s threat of 5% import tariffs on goods from Mexico (a total of $346.5 billion), followed by a further 5% every month on Mexico would have led to the following final losses for Mexican trade:
Tariff Level 5% = $17.33 billion dollars burden on consumers. This reduces Mexico’s U.S. trade surplus to $54.9 billion.
Tariff Level 10% = $34.7 billion dollars burden on consumers. This reduces Mexico’s U.S. trade surplus to $37.54 billion.
Tariff Level 15% = $52 billion dollars burden on consumers. This reduces Mexico’s U.S. trade surplus to $20.2 billion.
Tariff Level 20% = $69.3 billion dollars burden on consumers. This reduces Mexico’s U.S. trade surplus to $2.9 billion.
Tariff Level 25% (The final potential result) = $86.7 billion dollars burden on consumers. This reduces surplus to a deficit of $14.5 billion.
Now, the above calculations may make you think that Trump would be right; the U.S. would benefit from tariffs as they are now making a trade surplus with Mexico. However, the U.S. consumers would, assuming they could not find alternatives, lose nearly $100 billion in consumption and utility, but gain $14.5 billion in trade surpluses. A net loss. If the Trump administration is able to collect these tariffs, they may gain in reducing both the next export and being able to fund government spending, thus reducing the deficit. A direct transfer to the people would negate the effects of the tariffs (assuming they carry the entire burden), and so would be pointless to do.
Trump supporters claim that Mexican producers would simply reduce their prices as to create no loss of demand for their goods; however, Schiff (2019) counters with some points: What if the Mexicans are not operating with a 25% or greater profit margin? Will they sell at a loss to the United States?
The majority of tariff burden falls on the inflexible agent; if Americans need those goods from that country, they pay. If Mexicans need to sell those goods, they pay. U.S. companies who import parts from Mexico will have to bear the cost, as they inflexibly need these goods; these companies make up a large part of U.S. imports (BBC, 2019). They will then pass those costs to the consumers. They are also tariffing fruits and vegetables from Mexico; this will raise the cost of living in the U.S. This is not good for the economy in a year before his re-election campaign.
It will also impoverish the Mexican government; while this is the threat of a tariff, if the Mexican government were to collapse, where do you think these people would go? In every period of U.S. history when the U.S. economy does well while the Mexican economy does poorly, the rates of illegal immigration increase (Shapiro, 2019).
There are some thoughts that must be considered regarding this whole affair. Firstly, whether or not tariffs should be used at all. They cause potential short-term economic harm. There is an argument that this tariff threat differs from that of China; China acts as a geopolitical threat and rival to the U.S.; Mexico is not a rival to the U.S. The best way to keep people in Mexico is to make the economy of Mexico better (Shapiro, 2019).
Economists have calmed down over the threat of tariffs; for example, the maximum threatened tariffs for the U.S. is 1-2% of global GDP (Economist, 2019).
If Trump calls USMCA the greatest deal, why would he then immediately use tariffs (Schiff, 2019)? Also, the point of a trade deal is to create stable free trade; Trump immediately proved that he can apply tariffs with or without a trade deal, and isn’t likely to be held to a trade deal. This may also spur Congress to take some power from the Executive branch of the President, and back into the hands of the legislature. Trump continues to test the various powers of the Executive; it will be up to the other branches to control him (or not).
The global supply chains are being ripped apart by the tariffs; investors are likely panicking to decide whether to invest in companies with these global chains (Economist, 2019). This may weaken the U.S. stock market. The use of tariffs may also weaken U.S. soft power and control of the networks (Economist, 2019).
If tariffs are so good, why not tax imports by 50%, and make infinite money? And surely the producers will reduce their prices as well? So by the Trump administration logic, they can produce infinite free money for no pain to the U.S. consumer (Schiff, 2019). However, as we have seen with the Chinese trade war, the U.S. consumer bears the brunt of tariffs, and the U.S. exporters bear the brunt of any retaliatory tariffs.
Many Mexicans feel that President Obrador of Mexico gave up too much too quickly; a senior member of the Opposition party of Mexico (the PRD) said it was a surrender. However, Mexico is currently under a bad economy (Shapiro, 2019). This has two effects: it would be unlikely that the Mexican government would be able to handle the strain of a trade war. It would also be unlikely that, while unpopular, the Mexican government can do so much to limit illegal immigration (Shapiro, 2019). It will likely drop the government popularity. It also hurts the Mexican families who rely on their family to send their payments back home to Mexico. In a country where the government is fighting with the cartels for power, Trump has potentially weakened the government’s ability to project power to its own people.
Ultimately, we can claim this. Trump wanted to use tariffs to force Mexico to do something about the immigration problem; a problem that the Mexicans like, and enjoy the benefits from. He has done so to a President who ran on being tough on Trump, as well as having a bad economy; President Obrador may find himself in electoral trouble because of this issue.
We also have the issue that tariffs seem to work; Trump has smashed through multiple problems using the financial might of the United States, and it seems effective. There is the looming threat of recession, but in this example, he got an almost perfect win (from his perspective). We can likely expect further tariffs to be thrown around; I mean, they seem to work for him, so why not?
The victims of illegal immigration are the poor, Black, and Hispanic. The effects of this policy may be a bettering of their employment chances, wage will have an upward pressure, and overall enjoy a better life; that is, if those jobs are not automated or shipped abroad.
We can also expect, when combined with the issue of China, that companies may begin to either bring more jobs into the U.S., or perhaps begin to plan around the U.S. in their supply chain to reduce the chance of being tariffed into a difficult position. Mexico used to be a favourite for FDI, especially from the U.S. I believe that, if Trump stays in office in 2020, that Mexico will lose that favoured investment status due to the risk of another immigration-related trade tariff.
We may also see movement from Congress to return the power of trade back to Congress; the problem with centralising power is that sometimes someone you don’t like will get that power as well and be able to use it just as much as your own guy.
All in all, I suppose President Trump can call this a win.
For the sake of ease of reading, I’ll put most of the modelling, assumptions, and such here.
*People don’t buy competitors products, people do not change supply chains, and producers choose to continue to export to the United States. Let’s also assume the the American people have a unit elasticity of consuming Mexican goods; meaning that a 1% increase in price leads to a 1% decrease in consumption. Let us also assume that this elasticity is neither increasing or decreasing; meaning people’s behaviour does not change more or less than the price changes. We assume all costs are passed directly onto the consumer. Each 5% of tariffs leads to a 5% reduction in goods exports from Mexico to the U.S. of $17.33 billion, with the above assumptions.
**Amusingly, Borjas in 2017 referenced Borjas in 2018 on page 4 of his paper; time traveller perhaps?
In all articles, I provide as much information for sources as possible, including links. I encourage everyone reading this article to read deeper, and make their own conclusions. For students, links are here so they can read the original source themselves.
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