Shutting Off Trade With Mexico Is An Amateur Mistake
President Trump’s recent claim that closing off its southern border would somehow produce a “profit” for the United States by eliminating the U.S trade deficit with Mexico would earn a first-year economics students a fail. But it does express some common underlying misconceptions about the economy and trade.
The president’s comment seems to be based on the common but mistaken notion that exports are always better than imports, and the large U.S. trade deficit in goods create growth opportunity for the U.S. economy. But history, as well as basic knowledge of economics, tell us it is not closed borders but open ones that build prosperity. Moreover, manufacturing companies maintain production operations in developing countries like Mexico because it is necessary, and because it facilitates supply chains that make production more efficient, not less. By increasing scale, companies are able to bake a bigger pie, and give many a chance to cut off a slice rather than squabble over the crumbs.
A good example of that can be found in history. The three-week long GM Canada strike in 1996 serves as a good example of what actually happens when imports stop flowing into the United States. The strike by the Canadian auto plant didn’t just idle four assembly plants and numerous other facilities in Canada. Because GM operations were tightly integrated even then, the interruption of the flow of parts and vehicles had a swift domino effect, almost immediately prompting the company to close plants and lay off close to 2,000 workers in Michigan and upstate New York. Many other GM plants in the United States were subsequently slowed and stopped. Auto analysts estimated the automaker was a day or two away from having to shut down most of its North American operations when the strike ended after three weeks. Far from creating low-hanging fruit for American workers to grab, the cutting of GM’s supply chain made it harder than ever to reach the fruit they had already been picking. U.S jobs were lost, not gained.
It is hard to see any short-term economic benefit at all from sealing off production in Mexico or any other country. Manufacturing plants cannot be turned on and off like a water faucet. Plants require a heavy capital investment and are built to last decades. GM has shut down more than 20 plants that had been in operation for more than 40 years, including facilities in upstate New York, Michigan and Wisconsin that had stood for more than 95 years. Few are shut down after a lifespan of 20 years or less.
Moreover, integrating supply chains across borders only makes a company more efficient. Cutting off production at the border for any length of time would just undermine that.
Auto industry and other manufacturing jobs in the United States depend on the cost efficiencies that companies can achieve in Mexico. What is a Mexican car? What is an American car? The vast majority of vehicles that GM and other Detroit automakers produce contain bits made here and pieces made there. Production of almost every vehicle is sourced in at least two of the NAFTA countries, with some parts made offshore, resulting in a blended, competitive price. Not surprisingly, Mexican auto workers receive substantially lower wages than their American counterparts, as they generally occupy lower-skilled levels of the production process.
The fact that autos, parts and other manufactured goods and inputs can move smoothly and tariff-free across borders isn’t a bug, it’s a feature. Parts imported from Mexico and finished goods assembled there make U.S. products more competitive, not less.
The result? Overall North American production and sales have increased dramatically across the NAFTA countries. One can see the results in the sales numbers. A decade ago, North America accounted for 19 percent of overall auto industry exports. Today it is roughly 22 percent. The number and value of North American vehicles exported to the rest of the world have increased about 10 percent a year over the past decade.
Thinking that sealing off the border will force jobs to flow back to the United States is an amateur mistake. Recognizing that cross-border investment, production and trade generates more wealth and better jobs is one of the most important lessons of Economics 101.