It's hard to believe we are even having this discussion, but the threat of a destructive trade war with Mexico is suddenly a possibility. Hard to believe, because there exists more real-world evidence of the damage created by protectionism than practically any other tenet of economics. If one really wished to destroy American jobs and reduce our standard of living, this would be just the ticket.
Christopher HopkinsThe 1994 NAFTA agreement succeeded in transforming North America into a tripartite auto manufacturing colossus. Component parts frequently cross borders six to eight times before final assembly in the U.S., Mexico or Canada. Total trade among the three NAFTA partners exceeded $1 trillion in 2015, a 300 percent increase since the pact was adopted. Remarkably, NAFTA countries represent just 7 percent of the world's population but generate 28 percent of global GDP.
The notion that we might demolish this achievement is no longer fanciful, despite abundant warning from previous protectionist debacles.
During the early throes of the Great Depression, Congress opted to impose tariffs on thousands of goods in an effort to stimulate U.S. production. But other countries reciprocated in retaliation, and by 1934 global trade had fallen by two thirds. The Depression thereby became deeper and more painful, and only really ended completely with the liberalization of trade under the Bretton Woods agreement following World War II.
American presidents have repeatedly fallen victim to the temptation to shield domestic industries from competition, invariably with negative results. President Reagan, against his own instincts, agreed to voluntary import restrictions on Japanese cars. The result was a $2,000 increase in the price of a U.S.-made car in today's dollars. The blunder cost 60,000 American jobs between 1982 and 1984 according to the Brookings Institution.
President Obama fell victim to the siren song of protective tariffs in 2009, when he imposed duties on cheap imported Chinese tires. The Petersen Institute estimates 1,200 US jobs were saved temporarily, but American consumers shelled out $1.1 billion in higher prices. Do the math: that means each job saved cost American consumers more than $900,000. And of course, many of those jobs remain in jeopardy or already are gone due to automation.
Every example of targeted protectionism in our history has yielded the same result: higher prices, reduced sales and fewer U.S. jobs.
The current saber rattling with Mexico should alarm U.S. workers. Our southern neighbor has become our third largest goods trading partner, with total bilateral exchange of $531 billion in 2015. Mexico has become the largest foreign supplier of parts to the U.S. auto industry, while a typical vehicle assembled in Mexico contains 40 percent American-made content. Slapping a tariff on Mexican manufactured goods would cost Americans in lost jobs and more expensive cars.
The Detroit-based Center for Automotive Studies recently published a paper examining the impacts of NAFTA and the potential damage from abrogating it. Contrary to popular belief, their work suggests increasing manufacturing employment in Mexico actually leads to more high-quality jobs in the U.S. And should the President impose a 35 percent duty on Mexican products, the Center estimates more than 31,000 American manufacturing jobs will vanish.
Intuition is a poor guide to a complex subject like trade. One might reasonably believe that limiting imports would stimulate increased domestic production. While this may be true in the short run, the longer-term consequences invariably include reduced employment, higher prices, less efficient U.S. firms and a lower standard of living for Americans. In the extreme, a global trade war would plunge the world into recession. Here's hoping we can learn from our mistakes.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.