By Iván Carrino.-
America´s new president wants to carry out a trade war with Mexico in order to benefit the United States. As a result, both countries will lose.
The left wing if facing a worldwide dilemma. It despises Trump´s views on immigration, his manners and his proposals entailing economic deregulation.
However, in relation to international trade they tend to agree with him since there are few people as protectionist as the new president.
In an article published a few months ago the Wall Street Journal maintained about Trump´s protectionists stance that “Mr. Trump is so delirious about trade policy that he makes Hillary and the democrats seem sensible”
The most recent novelty arrived before Trump was inaugurated. Ford has decided to cancel an investment project valued in US$ 1.600 million on the Mexican town of San Luis de Potosi. The decision was taken with the objective of investing US$ 700 million on a factory in Michigan, emblem of the automobile industry and site of Michael Moore´s first documentary on the hardships the city faced after General Motors closed it factory to move to Mexico.
This turnaround in the company´s policy is directly related to Trumps campaign pledges since he suggested that those who outsourced their production to Mexico should face high tariffs when importing their products back to the United States.
That is to say, if Ford, in order to lower costs, decided to open its new factory in Mexico it would lose the benefit when importing back to the US because higher taxes would increase the cost of the final product.
Michael Moore, one of Donald Trump´s toughest critics, probably celebrates this. In essence, thanks to the protectionist threat now employment in Michigan will be higher and businesses will think twice before outsourcing to Mexico.
The superficial view on the topic is precisely this one: Mexico will lose investments, but the United States will get them. We are sorry Mexican brothers, but our president wants us to live better so you have to lose so our workers can find jobs.
Nevertheless, this is not the whole picture, and while Mexico will certainly be harmed, American themselves will also suffer.
The first reason is easy to see. If under direct or indirect threats American businesses reduce their investments in Mexico, a country of 122 million people will be harmed by having less demand for workers and less businesses competing to increase salaries.
The stock of United States foreign direct investment in Mexico was US$ 108 000 million in 2014, representing the biggest foreign investment in the country. If this amount is reduced, Mexico will have to make bigger efforts to attract investments from other countries in order to maintain its economic growth.
If one focuses on Michigan, everything looks great. Now Ford, instead of investment in foreign countries, will sink US$ 700 million of its capital into the American economy. Predictably, this lead to an increase demand of raw materials and workforce, increasing production in the state.
Its good news for Michael Moore, but not as much for other Americans.
Ford initially decided to start investing in Mexico to “increase the company´s cost effectiveness”, lowering costs. And what the US, like every other country, need is cost effective companies.
Think as a Ford investor. If the company is cost effective, he will receive a bigger dividend. With this bigger dividend he will be able to consume more, increase savings or invest more. In savings increase there will be more funds available for new investments, because the interest rate will be lowered. If instead the money is invested, the price of stocks listed in Wall Street, increasing the wealth of other shareholders and enabling new investment projects.
Another negative effect of protectionist policies is that Ford´s forced investment will compete in the market for scarce resources (workers, land, raw materials), increasing prices. This will work as a barrier against new investment. In international commerce this is called a distortion in production because it is well known that tariffs forcing production subtracts valuable resources from society leading them into certain industries in detriment.
This means that Trump´s policy may benefit the American automobile industry, but it will be disastrous for construction, mining, agriculture, commerce, and transportation. Activities that, among others, represent 99,1% of America`s GDP. To the extent that it materializes, Trump´s protectionist demagoguery will strongly affect Mexico. However, by reducing the profitability of American businesses and increasing the price of production supplies, it will also affect the American economy.
In sum, the protectionist story always ends in the same way. With a privileged class, that subsist by being protected, and a society that is mostly impoverished because of the distortions this creates. The US will be no different.