The Supply Chain Becomes A Pawn In The Immigration Debate

Commentary

Maybe it's not a surprise that the Trump Administration announced tariffs on Mexican imports of up to 25 percent unless that country helps stem the tide of illegal immigrants crossing the U.S. border. Slowing the tide of immigrants was a campaign promise of then-candidate Donald Trump, yet he has been stymied in attempts so far to fulfill that promise. His previous attempts, which have included more traditional methods such as threatening to cut off aid to Central American countries, to building a wall, to closing the border entirely, have all run into issues, both political and legal.

The use of tariffs, though, brings a new level of concern for the American and global economies. President Trump has repeatedly used tariffs or the threat of tariffs as a negotiating tactic. He's done it with China, the European Union, Canada and now Mexico. He's pulled the U.S. out of trade deals, such as the Trans-Pacific Partnership, but has signed very few deals to this point. The most significant one, according to many economists, is with South Korea that opens up that market to U.S.-made pharmaceuticals.

Even his trademark deal, the United States-Mexico-Canada Agreement (USMCA), which would replace the North American Free Trade Agreement (NAFTA) has yet to be ratified by any of the countries. Already, there is talk that ratification of USMCA could be delayed or scrapped entirely as a result of this Mexico tariff announcement.

While there may very well be legitimate uses for tariffs, they do introduce uncertainty to the market. For the businesses responsible for moving the nation's freight, that is not a good development.

By weaponizing the supply chain for purposes other than a trade imbalance, though, the Trump Administration is introducing unnecessary and dangerous uncertainty into the process.

If you are a CEO, what should you do?

Manufacturers shift plants

As the trade war with China has ramped up, companies responded by announcing facility moves, much of those from China to Vietnam. Chinese investment in Vietnam rose almost $5 billion in the first quarter of 2019, according to the Securities Times, a Chinese state-run newspaper. Investment in Vietnam was up $10.8 billion in the quarter.

Hasbro and Olympus are two companies that announced manufacturing relocations from China.

Mexico, interestingly, has also been a big winner to date because of the U.S.-China trade spat. In 2018, Mexico's export of goods to the U.S. such as leather, aluminum, hats, fabrics, ores, iron and steel increased, while those same Chinese exports to the U.S. declined, according to Mexico News Daily. Some of that is plant relocation, although much of it may be due to companies shipping goods from China and other countries into Mexico for final shipping into the U.S., effectively avoiding tariffs.

The question CEOs must be asking today is: Where do you locate a plant?

Plant relocation is a major driver of freight activity, obviously. Plants are also multi-year, multi-million dollar investments and decisions on where to place them involve more than just current policies. The role infrastructure such as rail or trucking plays is a critical decision in the process.

Plants drive freight and freight drives jobs. Seventy-one percent of freight that moves between the U.S. and Mexico does so on trucks, according to the American Trucking Associations (ATA). There are 12 million truck border crossings per year in the U.S.

"Cross-border trade [between the U.S., Canada and Mexico] supports over 46,000 U.S. trucking jobs, including 31,000 U.S. truck drivers, and generates $6.5 billion in revenue for our industry annually," said Bob Costello, ATA chief economist in 2017 during negotiations for the USMCA. "As the U.S. renegotiates this agreement with Canada and Mexico, we urge them to keep the tremendous benefits to our economy and our industry in mind."

This time, though, it's different. Or is it? In announcing the Mexico tariffs, President Trump tweeted that "the United States will impose a 5 percent tariff on all goods coming into our country from Mexico, until such time as illegal migrants coming through Mexico, and into our country, STOP. The tariff will gradually increase until the Illegal Immigration problem is remedied."

Then, this morning, Trump seemed to shift his reasoning in a tweet.

"Mexico has taken advantage of the United States for decades. Because of the Dems, our Immigration Laws are BAD. Mexico makes a FORTUNE from the U.S., have for decades, they can easily fix this problem. Time for them to finally do what must be done!," he tweeted.

Are the tariffs in response to Mexico's lack of action to help the U.S. on immigration, or because Trump feels Mexico is benefiting financially from its relationship with the U.S., which is the reasoning cited for the trade battle with China.

Peter Navarro, director of trade and manufacturing policy for the Administration, admitted as much in a CNBC interview this morning.

"The supply chain is better off in other places, better yet, bring that here," he said. "It's really a good thing to invest here in America."

When asked if these tariffs were not about immigration but rather reshoring jobs, Navarro quickly pivoted back to the immigration points. "This is strictly about national security and threats to our economy," he said, although he noted several times how U.S. steel and aluminum jobs increased following those tariffs.

The ultimate answer is political in nature, but it doesn't really matter to freight businesses. What they want is certainty, and through no fault of their own, that certainty has been tossed out the window as the supply chain is now being utilized as a pawn in the immigration debate.

Image sourced from Pixabay