Why a trade war with Mexico is a bigger deal

So I received several questions about the prospects of trade war with Mexico and why it seemed there was a bigger deal made about it compared to a trade war with China. The answer is pretty obvious when you look at the data.

The total flow of goods (imports and exports) between the US and China in 2018 (according to the Census Bureau) was almost $660 billion. In 2018 the same amount for Mexico was just under $612 billion. Now $48 billion is a large sum of money, but I wage it is a surprise to many that the total trade flow between the two countries is so close. Here is another surprise: Mexico is more important to US businesses. Why do I say that? Look at the dollar amount that the US exports to the two countries.

In 2018 the US exported $120.3 billion of goods to China. In the same time period the US exported $265 billion of goods to Mexico. The US exports twice as much to Mexico as it does to China. Why does this create a concern for trade policy?

The President is talking about imposing tariffs on imports to the US from Mexico. We can discuss the efficacy of tariff policy as an inducement for immigration policy changes at another time. The issue is this: if we start to impose tariffs on Mexican goods and they start to impose tariffs in return, which they likely will be able to do, it will be far more impactful on US businesses.

The imposition of tariffs is passing on higher prices to US consumers. That is, we are paying more for goods as a result of the tariff. Over time this will change supply chains and such, but it takes time, and we pay more for a while. In addition, after a supply chain change there is no reason to believe prices will come back down if consumers are used to paying higher prices.

The difference with the Mexico situation is that while we might pay higher prices for the goods coming in, Mexico has a real chance to raise tariffs on the US exports and impact American producers that way. In particular this has farmers worried (see this article from CNBC.com).

The China story gets more attention because the trade deficit is so large (over $400 billion) for the US. The deficit with Mexico is a paltry $81.5 billion by comparison, or around one-fifth the deficit with China. As mentioned, the policy dynamics are very different with Mexico and can have a very serious impact on the US in ways not seen in the policy dispute with China.

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