Trade with Mexico: Playing Chicken
Farmers and Texans would lose most from barriers to trade with Mexico.
MEXICO sells America more goods than America sells Mexico, and it enrages President Donald Trump.
In 2015 the difference was $58 billion (0.3% of GDP).
That is enough, thinks Mr Trump, to justify rewriting the North American Free-Trade Agreement (NAFTA), which allows goods to flow across the Rio Grande free of tariffs.
Yet the trade deficit masks bigger figures: America sends almost $240bn in goods to Mexico every year.
Were NAFTA to disappear in a renegotiation-gone-wrong, many Americans would pay a price—and not just as consumers faced with dearer avocados.
Which American producers would suffer?
Suppose, optimistically, that each side followed World Trade Organisation (WTO) rules.
Then, tariffs would revert to so-called “most favoured nation” rates. (That might sound vaguely friendly, but it simply means neither side can offer a different deal from what it gives to any other WTO member.)
By matching these tariffs to trade flows for about 5,000 goods, The Economist has estimated which states’ exporters would be worst-affected by the levies.
Farm states face the highest charges.
Whacking tariffs on malt, potatoes and dairy products would cause Idaho’s exports to Mexico to incur an average levy of nearly 15%.
Iowa and Nebraska would pay on average 12.5% for the privilege of sending goods over Mr Trump’s wall.
Some products would be particularly badly hit.
In 2015 Iowa’s farmers shipped $132m of high-fructose corn syrup to Mexico.
Without NAFTA, Mexico would slap a tooth-aching 100% tariff on the stuff.
Little wonder that the farm lobby tends vocally to support free trade.
Yet farm states are lucky to have plenty of customers elsewhere.
Idaho’s exports to Mexico are worth less than half a percent of its GDP.
Other state economies are more tangled up with Mexico’s.
These places should worry about NAFTA’s fate despite facing low average tariffs.
Among this group, Texas stands out.
It faces an average tariff of only 3%, but its exports to Mexico are worth nearly 6% of its GDP (compared with 1.3% nationally).
As in Iowa, farmers would suffer.
Texan cuts of Gallus domesticus—otherwise known as chicken—would incur the largest tariff bill, $174m, of any single product category in the country.
In total, as a percentage of GDP, Texas would pay more than any other state.
Michigan also fits this category.
Its exports of cars and parts—many of which end up back in America—would attract tariffs averaging only about 5%.
But with such shipments totalling $4.1bn, the bill would be painfully large.
All this gives Mexico some leverage.
But Mr Trump has a stronger hand, because Mexican firms depend more on American consumers than vice versa.
Part of the problem may be that rural America is already in the bag for the Republicans.
Of the 25 states which would pay most in tariffs, as a percentage of their GDP, only four voted for Hillary Clinton in November.
Mr Trump may not feel any need to obey WTO rules.
The White House’s latest trade spat is with Germany, a country already paying WTO tariffs (because no trade deal exists with the European Union).
Peter Navarro, Mr Trump’s chief trade adviser, told the Financial Times on January 31st that the “grossly undervalued” euro has allowed Germany to “exploit” America.
The White House has also recently hinted that it will adopt a congressional plan to “border-adjust” the corporate tax, which probably breaches WTO rules.
If Mexico retaliated with rule breaking of its own, the costs to American producers would be greater—and harder to predict.