Trump’s Mexico tariffs would hurt NC commerce

On May 30, President Donald Trump announced that, effective June 10, the United States would levy a 5 percent tariff on all products imported to the United States from Mexico. Trump seeks to use tariffs, or the threat of tariffs, as a means of compelling Mexico’s government to stem the flow of undocumented migrants into the United States.

Many business groups have reacted negatively to this announcement: the U.S. Chamber of Commerce questioned whether linking migration policy with tariffs was an effective strategy. I The Chamber went on to point out that the costs of tariffs would be borne by U.S. firms and consumers (rather than by the U.S. government). Coming on the heels of a continuing trade war with China, including the May 10 increase in the tariff rate on $250 billion of imports from China, this announcement has rattled financial markets. Investors worry that increased costs to U.S. firms and consumers will push a seemingly-strong economy toward recession.

Here in North Carolina, increased tariffs threaten to inflict damage on a range of industries. Mexico is our state’s second largest trade partner (for imports as well as exports). Our state’s exports to Mexico have increased more than six-fold since 1994, when the North American Free Trade Agreement (NAFTA) began. In 2017, North-Carolina trade exceeded $8 billion, and it was directly responsible for over 150,000 jobs.

Among our state’s top imports from Mexico are surgical instruments, wire and cables, and auto parts, all used as inputs by local firms. When these’ firms input costs increase, they are less able to sell their products in national and global markets. North Carolinians also import a significant amount of food and clothing from Mexico; with an across-the-board tariff, consumers will quickly feel the impact of tariffs — which are, indeed, a tax levied against those who purchase a product.

When foreign governments respond to new U.S. tariffs by increasing their own tariff barriers, North Carolina’s exporters lose out. Chemical companies, tobacco farmers, pork processors and auto parts manufacturers are less able to sell their products in China or Mexico.

The threat of tariffs against Mexico also threatens North Carolina’s economy in a second way: it undermines the credibility of the US government’s commitments to rules-based international trade institutions. Through institutions such as the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA), governments commit to reducing barriers to trade; to settling trade disputes through agreed-upon legal channels; and to resisting short-term temptations to impose trade barriers for non-trade reasons.

Institutions like NAFTA and the WTO are admittedly far from perfect; their creation even helped to accelerate the movement of some industries, such as furniture and apparel, out of North Carolina. But these cross-border transactions are the core of the modern global economy. Revolutions in communication, digitalization, automation and transformation mean that, even for a large country like the United States, engagement with global supply chains and overseas markets is fundamental for economic growth.

For the many North Carolina firms that regularly engage in trade – importing auto parts, industrial machinery or electrical equipment; or exporting chemicals, fabrics and pork products – institutions like the WTO and NAFTA (and its successor, the USMCA, which has not yet been approved by the US Congress) facilitate essential transactions. They give North Carolina businesses the confidence to invest in long-term, cross-border supply chain relationships. Doing so allows these firms to expand employment, invest in employee training and improve compensation.

But when North Carolina’s companies cannot trust that the U.S. government will keep the international commitments it has made with respect to its trade policies, they may hesitate to make longer-term commitments. They may worry about access to key inputs, or about retaliation against their exports from by other governments. These firms may be tempted to shift their operations — and their employment as well as their revenues — to countries that remain more enmeshed in global economic governance. So, while Trump’s talk of tariffs against Mexico may turn out to be little more than Twitter-account posturing, even talk erodes the confidence of many of our state’s companies, farmers, workers and consumers.

Layna Mosley is Professor in the Department of Political Science at the University of North Carolina at Chapel Hill. Her research and teaching focus on the politics of global finance and trade.