It’s hard to argue that since NAFTA went into effect in January 1994, trade relations with Mexico have been very beneficial for the US economy or its workers. According to the US Census Bureau, US trade deficits with Mexico between 1985 and 1994 were modest-never much exceeding $5.6 billion- with some years in a small surplus in favor of the US. Beginning in 1995, the deficits began to increase rapidly; in that year alone the US racked up a more than $15.8 billion trade deficit with Mexico (it was barely $1.35 the year before) which peaked in 2007, just before the “Great Recession,” at almost $74.8 billion. As the US economy recovered the deficits increased from a post recession trough of nearly $47.8 billion in 2009 at the bottom of the downturn to annual averages over the past seven years of around $60 billion, a figure which Trump is now touting in the media in order to make the case for Mexico’s financial liability for the wall. But as anyone knows, globalization isn’t about trade, its about investment. Trade deficits may burden central banks and national economies but they benefit transnational corporations. There’s a difference between global trade and international trade. International trade was generally between countries whose private companies exported from their national base where they were registered. In the global era, footloose corporations locate their manufacturing operations overseas and ship the output back home. The difference is the benefit goes mostly to the transnational corporation, not the country they in which they locate. This is the trade version of how, in the global era, gains are privatized which costs are socialized. Mexico didn’t earn the profits to pay for the wall, which is really more about immigration than trade. US transnational corporations did though they are not being asked to finance the wall.
In the first place, the trade deficit has nothing to do with financing the wall. As economist Mark Perry of AEI noted, "It’s not like there is $54 billion sitting around somewhere in Mexico, like a magic pile of dollars, that could be used to build a wall." Mexico’s national budget is strained already and it has no additional money to spend on the wall.
In the second place, Trump ignores many of the hallmarks of the current global era that characterize US/Mexican trade relations such as supply chains. The supply chains in the US/Mexican trade relationship as established by agreement consist of production whereby both countries work together to complete a finished product for the export market. This is called “production sharing” as described in 2011 study by the Woodrow Wilson Center. In a brief synopsis, the author of the study explains;
Mexico already buys more U.S. products than any other nation except Canada, but more than just an export market, Mexico and the United States are partners in manufacturing. Through a process known as production sharing, the two countries actually work together to build products. Imports from Mexico are therefore unlike imports from any extra-continental partner in the way they support U.S. jobs and exports. A full 40% of the content in U.S. imports from Mexico is actually produced in the United States...This means that forty cents of every dollar spent on imports from Mexico comes back to the U.S., a quantity ten times greater than the four cents returning for each dollar paid on Chinese imports.
A significant portion of merchandise trade between the United States and Mexico occurs in the context of production sharing as manufacturers in each country work together to create goods. Trade expansion has resulted in the creation of vertical supply relationships, especially along the U.S.-Mexico border. The flow of intermediate inputs produced in the United States and exported to Mexico and the return flow of finished products greatly increased the importance of the U.S. -Mexico border region as a production site. U.S. manufacturing industries, including automotive, electronics, appliances, and machinery, all rely on the assistance of Mexican manufacturers. One report estimates that 40% of the content of U.S. imports of goods from Mexico consists of U.S. value added content.
Trump conveniently ignores the effect of supply chains on national economies which make trade relations far more complex than they were in the pre-global era. One such factor is the
six million US jobs tied to US trade with Mexico as indicated in the report. According to a report by The Hill, the US Chamber of Commerce estimates that there are roughly 14 million US jobs connected to US/Mexican trade. One way US jobs are connected to US/Mexican trade activity is inputs from US industries in the final products manufactured in Mexico by US firms and exported back to the US market. For example, the Detroit auto industry exports nearly $11 billion worth of goods annually to the auto industry in Mexico illustrating the integrated nature of global production between trade partners. This means that US direct investment, and the supply chains thereby created, is probably the most significant part of US/Mexican trade relations. In 2011, the
US exported a total of $17.2 billion in motor vehicle parts alone to Mexico, by 2015 the total came to $23.8 billion. Semiconductors and other electronic components for consumer durables manufactured in Mexico also grew over this period by roughly one third from around $11 billion to $14 billion. In 2010, around the time this report was being prepared, the total stock of US direct investment in Mexico was $90 billion, more than six times the level just before NAFTA went into effect. By 2015, it had grown to $92.8 billion, according to the above cited Congressional Research Service report (it actually peaked at around $108 billion in 2014 according to the
Office of the US Trade Representative). According to recent reports based on
UN trade and investment data the US is the single biggest foreign investor in Mexico with more than half of total foreign direct investment in the auto industry.
US transnational corporations are the clear winners here. According to a
Petersen Institute report, the total sales of subsidiaries of US corporations in Mexico came to $252 billion in 2011-a nearly five fold increase since the start of NAFTA. This amounted to nearly a quarter of Mexico’s $1.7 trillion GDP in that year. Most of the US factories in Mexico that produce for the domestic US market are located in the so called Maquiladora sector, an export platform in northern Mexico where workers are exploited cheaply to ship low price goods to the US. Two to three million workers are employed in the
Maquilador sector earning between 50 cents and $2/hour. US corporations make billions in profit in Mexico though exact figures are hard to find. The Mexican government has a crushing debt exceeding half its GDP to which it must commit massive amounts of revenue annually. Deep poverty is rampant. To expect Mexico to pay for additions to a wall that already exists, the estimated costs of which come close to $25 billion, is absurd.
This is especially nauseating when one hears of Trump’s planned stealth methods of reimbursement for the wall’s costs that include charging impoverished Mexican workers in the United States a surcharge on their remittances to families back home as well as “border adjustment” taxes which are regressive consumption taxes on the US middle class and working poor for imported consumer goods. These are especially egregious because they are offset by a reduction in corporate taxes on profits of companies manufacturing these same products overseas. Worst of all, the wall is a wretched idea that will harm relations with Mexico and actually cost jobs in the US with no guarantees that physical and tariff “protection” will actually save or create jobs.
The only way to stimulate manufacturing employment in the US is to increase economic growth and income growth for the middle class which requires raising wages and massive public investment in job creation in things like infrastructure, health care, mass transit and clean energy. A slow economy, not high US corporate taxes-the effective rate of which is comparable to that of other OECD countries-is the reason big companies began leaving the US for global markets at the start of the 2001 recession. Bringing them back will require an increase in US government spending as well as US middle class income and purchasing power growth. It is well known that US corporations now seek to invest close to their markets. This is why so many located in Europe where wage, tax and regulatory conditions are similar to those in the US; sales were more robust over there and remain so today. But Trump is much more interested in slashing corporate taxes and promoting xenophobia than creating jobs in the US. His absurd plan to build the wall and squeeze both Mexican and US workers to pay for it will thus only help the rich and harm everyone else.