Last week, President Trump announced that he would impose a 5 percent tariff on all goods imported from Mexico, beginning on June 10. Over time, the tariffs would rise to 25 percent unless illegal immigration from Mexico to the U.S. stops.
This pronouncement illuminates a seeming paradox in international trade: Imports drive exports. The more open an economy is to imports, the more competitive its production and the greater its exports. This is one of several reasons why efforts to “help” a country’s economy by limiting imports tends to be self-defeating. I helped conduct a NAFTA study last year for Ecipe, a European think-tank, which examined the relationship between imports and exports. We saw two significant causal relations.
The first relationship is that almost 15 percent of the value of U.S. exports is sourced from foreign countries, with Mexico third in the rankings (behind only Canada and China). Indeed, some 8.6 percent of that 15 percent comes from Mexico. In other words, just over 1 percent of what the U.S. exports was imported from Mexico. Raising the price of that 1 percent makes the remaining 99 percent less competitive.
The second reason why imports drive exports: A significant percentage of what the U.S imports from Mexico includes inputs that originally came from the U.S. So Mexican manufacturers source from the U.S., then export finished (or semi-finished) goods to the U.S. For Mexico, 15.7 percent of the value add of its manufactured exports to the U.S. originally came from the U.S.
The 400 million population of NAFTA is a powerful tool for the United States, serving as an inducement for other countries to meet U.S. trading standards if they want access to this market. By the same logic, protectionist countries do not have much to fear from a U.S. trade strategy that is occupied with degrading NAFTA. Deterioration of NAFTA would not only mean a decrease in U.S. competitiveness, but it would also mean that the United States has less reach and negotiating power around the world.
President Trump has a range of immigration goals, much of which enjoys public support. But if he views trade policy as the appropriate tool for dealing with immigration issues, he will hurt the U.S. economy and weaken U.S.–Mexico relations, all with unclear immigration results.