By José Roberto Balmori*
Part of the tariffs proposed by President Trump are already a reality since the beginning of this week. Although there are still negotiations to reach the middle points, the starting point will now be the tariffs announced by the United States for a total of 25% for the products of Mexico and Canada. This is something that President Trump repeated tirelessly during his campaign, and that given the economic circumstances of the United States is relatively easy to implement.
Estimates by the Peterson Institutetechnical organism that studies free trade, indicate that the highest cost of these tariffs will be for Mexico, causing a loss of 2% of the potential gross domestic product, followed by Canada with a loss of 1% of the potential gross domestic product, and finally the United States, which would only let 0.25% of the potential gross domestic product go. These estimates would persist throughout the next two decades as long as there are no retaliative tariffs by Mexico and Canada. Now, if the three North America friends enter a war of tariffs, then the effect would be much greater. In this case, Mexico would lose 3.5%of the potential gross domestic product, Canada 2.5%, and the United States 0.5%. Again, this loss would persist year after year over a couple of decades.
Likewise, the inflation of these three countries would rise substantially. In this area, Mexico also carries those to lose, since inflation would rise an additional 2% if there are no retaliative tariffs or up to 4% additional with such tariffs. Canada, meanwhile, would suffer additional inflation of 1.5% without a commercial war or additional 3% if there is a commercial war. Finally, the United States would add half a percentage point to their inflation under the panorama without retaliation, while if there is retaliation inflation would reach an additional 1%. This additional inflation would be attenuated over a decade, in what the exchange rate and price expectations are adjusted.
The differential in the impact of President Trump’s tariffs is because the economies of Mexico and Canada are much more dependent on exports to the United States, compared to exports from that country to Mexico and Canada. While, for Mexico, exports to the United States represent almost a third of our economy and 78% of total exports, US exports to Mexico are less than 16% of its total exports and less than 1.25% of their gross domestic product. The same goes for Canada; That is, Canadian exports to the United States represent 77% of total exports and 17% of the total gross domestic product, while American exports to Canada are only 17% of total exports and, also less than 1.25% of its gross domestic product.
Therefore, it is true that President Trump has all the letters and can use this advantage for his own benefit. In particular, President Trump seeks that his neighbors close their borders to migrants from other countries, that fentanyl traffic be controlled, and that several companies that begin to leave China relocalize their factories within the United States and not in the territory of their neighbors. It is very likely that President Trump obtains many concessions from Mexico and Canada, and that his plan is consistent, since he begins to have a response from several foreign and American companies.
Mexico must deal with this new reality and keep our northern neighbors as happy. Likewise, internal consumption must continue to grow through investment and employment to deal with the challenges of a more closed world. Finally, you must think twice if you want to have many retaliative tariffs since the impact will be much greater for Mexicans. There is nothing left but to adapt to new scenarios as soon as possible to keep the ship afloat.
About the author:
*DR. José Roberto Balmori, director of the Bachelor’s Programs at the Faculty of Economics and Business of the Universidad Anáhuac Mexico.
Twitter: @jrbalmori
The opinions expressed are only the responsibility of their authors and are completely independent of the position and the editorial line of Forbes Mexico.
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