Closing the Border: Economic and Political Costs

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Mexico US Border, wikipedia

April 1, 2019 (San Diego) Let me be clear on this, closing the border between the two neighbors is a very bad idea. This might have made sense fifty years ago, perhaps during World War Two. And it has been closed in the past. The most recent event was after 911. The United States closed its air space, and all land and sea borders. That came with a large (but understandable) economic cost. As is, according to industry experts, the American economy is already slowing down:

Consumer spending rose 0.3% in February from 0.4% the previous month while personal income was flat in February following an upwardly revised 0.3% growth in January, the Commerce Department said.

The latest figure showed the slowest growth in income growth since July and in spending since September. The economy has been growing since the second half of last year after plunging into recession in December 2007.

Wage income was flat in February, the Commerce Department said as consumers continued to struggle to obtain cash.

This is one reason why this present threat makes no sense from an economic standpoint, But when the president seems not to understand the most basic things, and believes that trade deficits are bad…he wants revenge. In his eyes, everybody is taking advantage of the United States.

What is driving the present administration is a way to punish Mexico, but getting a recession in the process. will lead to economic chaos. It will mean economic disruption, and in-fact, the president is encouraging Central Americans to come to the United States every time he threatens to close the border. It will not solve the crisis. In fact, policies implemented by the Trump administration have created this crisis at the border.

This is not the first time that President Donald Trump threatens to close the border with Mexico. He has said this a few times, and once ordered the closing of the border between Tijuana and San Diego. This led to Serious economic losses. That single day closure cost San Ysidro $5.3 million dollars. It was the beginning of the Christmas season and merchants were affected. This only lasted a few hours, and it was chaos. We can only surmise this will be a problem if it happens again.

And yet, President Donald Trump is threatening to repeat this across the whole border. He is also saying it will be long term, damn the torpedos I suppose. The mistake many makes is to believe he is bluffing. He has said this before but had no schedule. This time we do, it will be this week, and if he does it, or rather when, it will lead to major economic damage to the country. It will not be limited to the border region. There are reasons for this. President Donald Trump has the authority to do this, but he is playing with fire.

Both nations are linked at the economic hip

Why? There are good reasons. After the North American Free Trade Agreement (NAFTA) was signed a deep process of economic integration began. We may be critical of the treaty. Or we may not. But the truth is this. The economies of both nations are joined at the proverbial hip. The chains of supply and production are enmeshed deeply, with some products crossing the border a few times during production. Moreover, we depend on products made in Mexico for our internal chains of production. In effect, five million Americans depend directly on Mexico for their employment.

Closing the border will affect our economy within days. I know the president could care less about Mexico, why I mention this just in passing, but they will also face deep economic headwinds. One reason immigration to the United States from Mexico is in negative numbers is because of this integration. A crisis in the Mexican economy will likely reverse this trend. However, it will have deep effects for the American consumer as well.

Do you like your cheap veggies and fruits? Especially during the winter, they come from Mexico. Do you like avocados? Guess what? What about parts for your cars? Computers? Clothes? Energy? The list is long.

Let’s be clear. The two economies are linked. Billions of dollars go across that border every day. It comes to $611 billion dollars a year and rising. Mexico is the United States third largest trading partner. The second is Canada. So this is literally shooting our economy in the proverbial foot.

A disruption will cause serious havoc in this cross border traffic. Incidentally, a lot of it includes American citizens who live on the Mexican side (where housing is far more affordable) and cross to the United States every day for work and school. They will be stranded. This could also include tourists who chose a bad week to travel to Mexico.

Car factories, for example, may shut down. Why? Supply chains rely on “just in time” deliveries. Meaning, they do not have warehouses full of goods that will last weeks. As Brookings explained back in 2015:

Companies, cities, and states must import to compete in today’s integrated economy. The United States depends on intermediate goods imports from its North American neighbors more than from other parts of the world. In 2015, intermediate goods imports accounted for 43 percent of total U.S. goods imports. From Canada and Mexico, the share was 50 percent, much higher than the European Union (37 percent) or China (28 percent).

We saw some of this after the Japan quake, where America factories slowed down, or stop because parts made in Japan could not leave that country. Even the 2016 quake disrupt those supply chains.

This is man-made. In this case, short haul, and even some long haul truckers live in Mexico. What happens when they are unable to report to work? How does your bauble that you bought on Amazon make it to your destination? Some of that might be affected by this.

The United States is proving to be a very unreliable partner under the Trump administration. This will drive another nail into that coffin. We know that the administration wants to retreat from the world. This is one way to ensure that this happens.

Will Mexico react? First off, they will be justified under international law. Second off, Mexico is having its own internal issues. In case you wonder, Mexico is also seeing a fair share of xenophobia. But stopping trade will accelerate internal dynamics that we may very well not want to encourage.

This is not well understood in the United States, but Mexico is undergoing its own populist moment. It is a reaction to the Neoliberal order that led to NAFTA and the liberalization of trade. That started under Miguel de la Madrid in the 1990s and led to the Washington Consensus. This is the same consensus that Trump is rejecting as well. This is the process of globalization that has created many winners, but also many losers.

While the standard of living did get better initially, and the wage gap is not what it was, not all Mexicans have benefited. Like the American Middle Class, the Mexican Middle Class is under intense pressure. Mexicans rejecting both the Center Right PRI and the right wing PAN did not come as any surprise to observers. Just as Trump was not a surprise in the United States. That said, the White House is likely in for a shock since Mexico is not going to do the US bidding. The policies are waking up a lot of ghosts, that once were thought to be vanquished.

President Andres López Obrador, AMLO as he is known, is part of the old militant left-leaning PRI. He is also part of a far more nationalist, populist tradition. These are the people who lost out the internal battle to the technocrats of the De La. Madrid and Peña Nieto generation. They can, and do, speak the language of resentment and nationalism. In that sense, they are not that different from the president of the United States, which also relies on resentment and crass nationalism.

Americans may not get this. AMLO is entering office with a view of the United States that resides in the far past. It is the Mexico of distrust and distance from the United States. Trump is not helping. In fact, those views are becoming more popular once again, because no nation likes to be embarrassed, or worst, by another nation.

AMLO might be forced to do something the last generation of Mexican politicians has not. This is to cool US-Mexico relations. If he does that, the cooperation that Trump envisions May very well not happen. And the present cooperation might just go away, with the explosion of American security personnel, who are embedded closely with Mexican security officers. We may even lose access to intelligence on drug lords and Mexico may even legalize all drugs. So far they have not, under pressure from Washington.

AMLO May even go a step further. Mexico nationalized the oil industry in 1938. While Exxon, Shell and Aguila Petrolera went away, PEMEX was born. One campaign promise made by AMLO was to reverse the energy reform. In this sense, he is old fashioned, and like Trump, seems to believe the future involves oil. Nevertheless, he may order the seizing of US assets, such as the Sierra Juarez wind farm.

Meaning, Sempra Energy would lose that power, but the direct effect will be to the San Diego region. We rely on that power. Without it, there is a chance we could see brownouts. Moreover, Sempra will have to recalculate its numbers regarding the state Climate Action Plan and will have to build more facilities on the US side of the desert.

Let’s be clear. Trump is driven by great racial animus toward Mexico. We know this. There is no doubt in the way he expresses himself. It is also status loss fear, as well as the end of the white race. This is driving quite a bit of the far right, not just in the United States, but also across Europe. They are part of Trump’s base.

He is doing all he can to raise fear and hate among his base. He also wants to punish Mexico (as if it was occupied territory). Why he keeps threatening. And It is not just Mexico that he keeps doing this too.

Trump cut foreign aid to El Salvador, Honduras, and Guatemala. Incidentally, the first act as president by AMLO was fund economic development zones in these three countries. The way to slow down Central American migration is to stabilize these nations. Like Mexico was a generation before, a good economy with more instability will slow down and then reverse this migratory trend. Mexico understands this. Why? It’s part of its recent experience.

By cutting this aid and threatening to close the border, desperate people are joining the flow. They know in their hearts they need to escape. They also know that the destabilization of the region has been an American foreign policy project for decades. This will hurt Central America further, and perhaps Mexico. It could be a problem for the nation, but one that Trump will not see. These acts are reversing decades-long trends, it will take at least half a decade for the trends to be revised in obvious ways.

Long term this is not good for relations with these nations, but also continues to prove the US is a very unreliable partner. New alliances are already forming. Some will be meant to contain the US under Trump.

One has to ask…is the President trying to crash the American economy?

This is not a pleasant thing to wonder. Is the president trying to crash the economy? There are reasons to ask this, never mind each of these political and economic moves ultimately hurts his base.

The first is the trade war with China. It has slowed down or stopped soy and other agricultural exports to China. This has hurt the Midwest. It has also led to the slowdown of the global economy. Yes, the Chinese economy was hurt. But so were thousands of American farmers in the Midwest. This is Trump’s base.

Mexico is slowly replacing China as an export market for these farmers. Mind you, not corn. Mexico will not accept any transgenic grains. But other goods are slowly going south instead of east.

The economy has been Trump’s selling point. He likes to point to it. However, it is slowing down. What effect will it have if we enter a recession in the 2020 race for the White House? A bad economy may be Trump’s way to harden power. Just because this has never happened in American history does not mean it could not happen. Trump is sui generis in that sense. He thrives under chaos and causes a crisis. Why? He is a right-wing populist and he uses fear as a tool. He also has portrayed himself as the essential man who can solve these crises he creates. The border is becoming a policy-driven crisis, that, of course, he will solve.

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