After Trump’s inauguration on Friday, there is no doubt where he stands on trade:
“Every decision on trade, on taxes, on immigration, on foreign affairs, will be made to benefit American workers and American families. We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength.“
It is now clear that the vitriol that candidate and president-elect Trump espoused towards NAFTA and especially free trade with Mexico will be official White House policy under President Donald Trump:
“President Trump is committed to renegotiating NAFTA. If our partners refuse a renegotiation that gives American workers a fair deal, then the President will give notice of the United States’ intent to withdraw from NAFTA.“
As reported by Reuters, Prime Minister Trudeau spoke with President Trump about trade between their two countries on Saturday. President Pena Nieto planned to meet with President Trump at the end of the month to discuss, among other issues, trade. However, those plans have been scrapped after President Trump’s latest Twitter war.
The matter was further complicated when White House Press Secretary Sean Spicer announced that the administration would pay for a border wall with Mexico through a 20 percent tax on imports from Mexico.
Whether or not common ground on the future of NAFTA can be found is not known, but it appears that the White House is playing a game of chicken with its NAFTA partners.
Republican politicians along the US-Mexico border have not given President Trump’s trade plans their full-throated support. Arizona Governor Doug Ducey, a Republican, has been timid to support his party’s new leader on this issue and for a good reason.
Since NAFTA was signed in 1994, the economies of the United States, Mexico, and Canada have become significantly intertwined. The three countries trade three times the value of goods today as they did in 1993, approximately US$1.1 trillion. Many US, Canadian, Mexican, or other foreign businesses’ supply chains zigzag across borders to take advantage of different laws and regulations, proximity to markets, or lower wages, including automakers who recently came under the ire of the new president.
Earlier this month, Governor Ducey traveled through Arizona and Mexico meeting with business leaders and politicians. As reported by Arizona Public Media, Governor Ducey reiterated his position on trade with Mexico:
“I think we are going to find plenty of opportunities for places of common ground to focus on policy. There’s been a lot of discussion about free trade, which I believe in. But if we want to talk about free and fair trade, I’m open minded in understanding what that means and how that can help Arizonans find work.”
The governor’s answer highlights the difficult position that this election put him in. He has to walk a fine line between supporting, or at least not attacking, the leader of his party while still showing he supports the men and women of his constituency that depend on trade with Mexico and Canada for their livelihood.
Economists agree that if the United States withdraws from NAFTA, the results would be negative for the country. A return of tariffs would make foreign goods less competitive in domestic markets and force domestic businesses with supply chains in multiple NAFTA countries would either have to increase prices or live with reduced revenue in the short-run due. For states like Arizona, it would surely be much more exaggerated.
The Arizonan economy is deeply connected to Mexico. While trade as a percent of GDP is roughly the same for Arizona as it is for the United States as a whole, Mexico plays a far larger role. In 2015, trade between Arizona and Mexico was four times greater than with Canada or China.
The exchange rate is another factor that greatly affects trade. For border states, it has an additional effect as a pull or push on tourism.
Since 2014, the US dollar has strengthened significantly against the Mexican peso. As I showed here, the presidential election is partly to blame for an exceptionally weak peso too, which has made imports from Mexico more competitive in the United States. On June 16, 2016, when Donald Trump announced his candidacy for the presidency, the peso to dollar spot exchange rate was 18.9875. On the eve of his inauguration, the peso had weakened to 21.8910 pesos per dollar.
As CNBC reports, the peso was hit again after the recent news that President Pena Nieto would not meet with President Trump at the end of the month.
For Arizona, a strong dollar has three effects.
First, a strong dollar makes exports from the state less competitive in Mexico and second, it makes Mexican imports cheaper. Businesses that export to Mexico are hurt, since their goods cost more in Mexico, while businesses that sell Mexican imports will be able to sell their goods cheaper. Therefore, the overall effect on Arizonan businesses and consumers is more difficult to work out.
Third, the flow of Mexicans traveling to the Arizona to purchase goods will slow down. This is unambiguously harmful to the local economy since Mexican nationals spend roughly $7.3 million per day in Arizona. As Dr. Hammond from the University of Arizona explains: “Legal northbound border crossings from Mexico through Arizona’s border ports of entry have slowed since mid-2014 for personal vehicles, personal vehicle passengers, and buses.”
The strong dollar is partly to blame for a 13.2% fall in exports from Arizona to Mexico in the first half of 2016. While the bulk of the decline can be attributed to shifting commodity prices, manufacturing exports were down as well.
Fortunately, the President and his nominee for Treasury Secretary seem to understand this issue and have argued for a weaker dollar.
Attempting to predict the future with certainty is always impossible; the recent election in the United States is proof of that. However, it is reasonable to assume that the status quo will not hold, that trade in North America will shift under President Trump’s “America First” policies. For states like Arizona, the question is: In the race to make America First, will they be left in the dust?
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