Sunday, January 29, 2017

Trump And International Trade

Trump And International Trade
    I’m carefully observing what Donald Trump is doing about his campaign promises to stop foreign trading partners from taking advantage of us. He seems to focus all his attention on China and Mexico. China is very wealthy and very powerful. If Trump increased import duties on Chinese goods to 45%, China would retaliate in many ways. Some 1,800,000 US jobs tied to trade with China might go. Supply lines for many products will be disrupted.
       Mexico is a different case. Trump is indignant over the $60-billion dollar trade deficit that we have with Mexico. He focuses on the Mexican auto manufacturing sector. Depending on who you talk to, Mexico has an auto manufacturing industry that is between #8 in the world and #4 in the world. Mexico produced some 2.9 million motor vehicles in 2015. 70% of these vehicles go to the USA (Roughly 2,030,000) In 2015 Mexico produced some $81.5 billion in auto parts. If we apply the same 70% ratio, we see auto parts exported to the US with a value of $56.7 billion. Trump wants to put a 30%+ import duty on these autos and parts. Effectively the Mexican auto industry could no longer sell in the US. They would not have another place where they could start selling all these vehicles and parts. Automobile manufacturing plants owned by the likes of General Motors, Nissan and Volkswagen would close. This would cause large write-offs and financial losses to these automobile companies. US investors in these automobile companies would lose large amounts of money. Some 1.1 million US jobs are tied to trade with Mexico. Many of these jobs would be lost.
      There would be one other unintended consequences. Suddenly, the US auto market would have some 2 million less vehicles to sell and some $56.7 billion auto parts less to sell. In economics, we have the law of supply and demand. Where demand is strong and supply drops, prices go up. It would take up to five years to build auto manufacturing plants in the US and auto parts manufacturing plants to make up for the lost Mexican imports. Estimates are that prices for autos and auto parts would go up as much as 25%.
     I have heard comments that Trump will also stop the flow of tequila, tomatoes, etc. I doubt that.

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