Politicians are often taken to task for making election promises they fail to keep once elected. Candidates should be held accountable for the policies they advocate when campaigning for votes. However, delivering on the bluster that politicians often espouse during the heat of an electoral battle can do more harm than good.
President Trump’s stance on trade between the U.S. and Mexico is a striking example. During the presidential election, he vowed to stop jobs being exported to Mexico and to correct what he regards as an unacceptable trade imbalance between the two countries.
Once in office, the President wasted no time in following through on these promises. He proposed a 20% tariff on goods shipped from Mexico to the U.S. to pay for a wall along the border designed to keep out illegal immigrants and criminal elements. He promised “consequences” for U.S. companies that move manufacturing plants to Mexico, and lauded some manufactures for creating jobs on home soil rather than across the border.
Much has been written about why slapping tariffs on goods moving between the two countries is hugely damaging. The policy would undermine the complex supply chains that support key industries in the U.S. such as automotive manufacturing. American consumers would pay more for goods made up of components that cross the border several times. Consider, for example, the manufacturing process that creates a modern automobile seat belt. The Financial Times described some of the steps as follows:
- Nylon fibers are manufactured in Mexico.
- The fibers are then woven and dyed in Canada because the process requires a lot of water.
- The cloth is cut and sewn in Mexico where labor is cheaper.
- It is then fitted with other components such as buckles (also made in Mexico).
- The seat belt is installed in either Mexico or the U.S.
Even this list of steps is only partial, since it excludes the sourcing of nylon fibers and the assembly of the belt buckles made of metal and plastics. Moreover, since Mexico would likely respond to the imposition of tariffs with a tariff of its own, each product may have to collect multiple tariffs as material and components cross the border multiple times. The upshot is higher prices for U.S. consumers and less jobs for US exporters.
Forcing companies to base investment decisions on politically motivated trade policies rather than sound commercial judgment is not capitalism. Neither is providing subsidies and tax breaks to goad them into such decisions. Over the long term, protectionist policies will blunt America’s competitive edge. This scenario is described by Holman W. Jenkins, Jr., in a recent Wall Street Journal column:
“Behind the tariff barriers and cut off from international competition, the domestic manufacturing industry evolves slowly. In a decade or two, U.S. companies are technologically obsolete and inefficient compared with companies that operate in competitive world markets.”
Souring US/Mexico trade relations also alienates a friendly and powerful neighbor – especially when there is a physical reminder of American standoffishness in the form of a border wall.
A trade war with Mexico could result in a number of unintended consequences. Driving down the peso makes Mexican goods more competitive in the U.S. – not less – and American goods more expensive across the border, which will cost jobs. Prices are likely to rise in the U.S. reducing both local demand and the number of jobs created to meet that demand, while raising inflation. Putting pressure on the Mexican economy could cause living standards to fall and stimulate more immigration (note that over recent years net immigration has slowed and even reversed owing to the availability of more jobs in Mexico). The perception of America belligerence could stoke a resurgence in left-wing parties in Mexico; do we want another Venezuela on our doorstep?
In addition to these direct consequences, policies hastily drawn up to create the perception that campaign promises are being fulfilled can distract policymakers and society from the real issues and solutions. For example, in the heated debate sparked by President Trump’s ideas on addressing U.S./Mexico trade imbalances, scant attention has been paid to education. Yet educating the American workforce to compete in a fast-changing world is critical to job creation. Incentivizing companies to invest in American rather than Mexican jobs is all very well, but do we have the workers to take advantage of these employment opportunities? In many cases the answer is negative.
Perhaps American companies will be persuaded to build more factories in the U.S. only to realize that they have to import Mexican workers to staff them, as suggested by the Chief Supply Chain Officer of a leading manufacturer during a recent visit to the MIT Center for Transportation & Logistics.
I’m not suggesting that we encourage our elected representatives to renege on their election campaign promises. At the same time, delivering on pledges with ill-conceived policies to build credibility with supporters can be very damaging.
This article was written by Yossi Sheffi, Elisha Gray II Professor of Engineering Systems at MIT, and Director of the MIT Center for Transportation & Logistics. It also appeared as a Linkedin Influencer blog post.