The Guacamole Tax

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The Guacamole Tax

 

President Trump’s first month in office has been busy. In such a small amount of time, Trump has tried to deliver on the many promises he made on the campaign trail. On Monday January 23rd, President Trump signed an executive order to withdraw the United States from the Trans-Pacific Partnership (TPP). The TPP is a massive international trade agreement, including 12 countries that account for 40% of the global GDP and 20% of global trade. This agreement eliminated barriers to free trade and allowed the United States to shape labor laws and practices in Asia, all the while excluding China. Opponents of the TPP, including Trump, argued that it would hurt American business and would benefit the other countries more significantly than the United States. A day before pulling out of the deal, Trump announced that he had plans to renegotiate the North American Free Trade Agreement (NAFTA), a trade agreement among Canada, the United States, and Mexico that eliminated most tariffs between the three countries. For more than 20 years, many businesses based their decisions on NAFTA’s open structure. In two days, Trump has positioned himself to reverse America’s leading position in the global economy.

 

During the campaign, Trump promised to introduce tariffs as a threat against American businesses thinking about expanding production to other countries. Trump has also mentioned implementing punitive tariffs on Mexico for refusing to pay for the border wall. While these measures are supposed to protect America’s jobs and economy, they could end up hurting both. An example from history is instructive. After WWII, American chicken growers began exporting large quantities of chicken to Germany, where there was an extremely high demand. Before this flood of cheap chicken, chicken had been a luxury item in Germany, due to small-time German chicken farmers controlling the market. With the arrival of cheap, American chicken, German farmers tried to protect their business and high prices. The solution— Germany implemented an expensive 50% tariff on American chicken. Because German cars had become so popular in the United States, this prompted a retaliatory tariff on foreign-made vehicles.  Because of this trade dispute, both countries’ economies suffered. Germany had to pay much more money to ship their cars and America lost a high-demand market for chicken. Today, NAFTA helps the economies of the three countries by encouraging cross-border investment and regional trade, encouraging the capitalist, free-market economy that was hindered because of the trade disagreement over cheap, American chicken.

 

Trump’s plan to punish Mexico with punitive tariffs and border taxes for their refusal of payment for the border wall hurts free trade, and it likely violates NAFTA. The United States also has a lot to lose by severing economic ties with Mexico. The United States imports from Mexico $74 billion in vehicles,  $63 billion in electrical machinery, $49 billion in general machinery, and $14 billion in mineral fuels. Mexico also is our second largest supplier of agricultural imports. Produce such as avocados would shoot up in price, as 80% of all avocados imported to the United States come from Mexico. Restaurants like Chipotle, which uses 97,000 pounds of avocados every day, would, when faced with the sudden decrease in supply and the constant high demand, would have to dramatically raise the price of guacamole. Avocados would not be the only thing hurt by Trump’s plan. The free trade between Mexico and the United States is a two-way street. The United States also exports goods to Mexico. If Trump’s plan succeeds, Texas, a state that gave its 38 electoral votes to Trump, would lose a market for its $92.5 billion in goods, the largest export economy in the nation, exported to Mexico annually. According to The Woodrow Wilson International Center for Scholars, 382,000 Texas jobs are tied to this trade relationship with Mexico and would disappear if Trump withdrew the United States from NAFTA. Trump’s first actions in office will likely hurt American businesses like Chipotle and jeopardize American jobs. Get your guacamole while you can.

 

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The Guacamole Tax