Gary Galles – July 16, 2019
President Trump’s trade approach seems to be telling foreign producers and countries, “Do what I demand or I will punish you with higher tariffs that will make you wish you had.” The fact that such tariffs would largely burden American importers, rather than foreign producers, as he repeatedly claims in his errant focus on trade imbalances, however, makes this a highly questionable strategy for helping Americans. Harming my own citizens, and threatening to hike that harm unless others comply, in order to force others to treat my citizens better, has seldom actually helped citizens, while risking escalation into a trade war that will multiply the harm to all involved.
Perhaps we would do better if we stuck to “we will jointly reduce the restrictions on voluntary trade we impose” as a means to benefit all consumers, without the “or else” of doing the opposite if I don’t like the deal. And that is especially so, as such “or else” threats increase the risk all others will face in trusting us in future dealings as well as present ones, which can easily break many deals in our complex international supply-chain world.
The new BMW auto plant that just opened in Mexico provides an interesting illustration of the alternatives.
In anticipation of building that roughly billion-dollar factory, that would produce the next generation 3-series sedan, in 2017, the Trump administration threatened to impose a 35 percent import duty on BMWs it shipped into the US to try to force production to our side of the border. But that protectionist extortion attempt failed, precisely because Mexican producers have freer trade with other countries than do American producers, which is also why Nissan and Volkswagen have also increased their Mexican production.
Because Mexico has pursued far more free trade agreements than the US, its producers are able to sell, tariff-free, to countries that make up roughly three-fifths of world GDP. And avoiding such duties on sales to other countries is worth far more than US tariff threats can impose.
To illustrate, consider that Mexican vehicles can be sold in the EU duty free, but those imported from the US must pay a 10 percent import tax, a tariff hangover that goes back to the 1960s “Chicken War,” which involved a very Trump-like tit-for-tat mutual imposition of harm.
Given that even the base MSRP of a BMW Model 3 exceeds $40,000, avoiding a 10 percent tariff would save over $4,000 per vehicle sold from Mexico into the EU rather than from the US. That is an even greater per-car savings than what helped lure the production of VWs and Nissans to Mexico. And that is over and above the $600 to $700 per unit labor cost advantage Mexico has over the US, that has led to GM recently becoming the leading auto producer in Mexico.
As Tim Mullaney described the results, even before the escalation of President Trump’s “my way or I won’t let your vehicles onto my highways” approach, “car companies are building in Mexico rather than the United States, largely because it has freer trade than the United States does with the rest of the world.”
Despite Trump’s complaints about every previous trade arrangement struck without his “art of the deal” skills and his beyond-belief promises for what his approach would provide, it is very hard to see much difference from long-refuted mercantilist protectionism, which results in mutual burdens rather than mutual benefits. As the global vehicle market is demonstrating to us now, if we would only pay attention, the mutually beneficial arrangements that reducing trade restrictions provide are more effective than mutually punitive trade threats in advancing American interests.
This article was originally published at Mises.org. Gary M. Galles is a professor of economics at Pepperdine University.
Image source: Getty