A weak peso could offset Trump's 'border tax'

Almost from the moment he entered the 2016 president campaign, businessman-turned-politician Donald Trump has criticized the automotive industry for investing in Mexico, a country now among the world's five largest auto producing nations. Initially, the focus was on Ford which, last April, said it would move its small car production to Mexico. But in recent weeks, the president-elect has also targeted such manufacturers as Toyota, BMW and General Motors. The threats have wreaked havoc on the Mexican economy. And the peso has collapsed. It is currently trading at nearly 22 to the American dollar, compared to 18 on election day. And that was already down sharply from the beginning of the year, as Mexican trade became an election hot-button issue. "Compared to when we built our (last) plant in Mexico," the peso has fallen by almost half," said a CEO of a major foreign automaker's U.S. operations. "It makes me think about the opportunity of adding more there," he said, noting that, "this would probably offset any tariff they might impose." Several other senior industry executives with foreign-owned and Detroit-based carmakers said they also need to be considering the economics of Mexican operations, adding that if the peso continues to weaken, the country will retain its economic advantage, especially with reduced labor costs. That is a case of unintended consequences, former Treasury Secretary Summers added. "And the consequence of that is measured not in the dozens, or hundreds but in the thousands, or ten thousands or even hundreds of thousands of jobs." It is another example of "class populism (being) invariably counterproductive for those in whose name it is offered as a policy regime," he said.

A trade war could be counterproductive

Summers is by no means the only one worrying that a Trump tariff could be seriously counterproductive. A study released last week by the Center for Automotive Research warned that eliminating or sharply scaling back on NAFTA could seriously impact the U.S. auto industry, especially in the American Midwest, where much of its manufacturing still takes place. "Counter to the incoming Trump administration's goal of creating manufacturing jobs, the withdrawal from NAFTA or the implementation of punitive tariffs could result in the loss of 31,000 U.S. jobs," said a summary of the report by CAR, a highly respected automotive research firm in Ann Arbor, Michigan. "The decline of the peso is not insignificant," said David Cole, the director-emeritus of that auto think tank, and now the director of an industry-backed effort to increase high-tech training for American manufacturing workers. "You could argue the weakening of the currency could have significant advantages" for Mexico. Cole and others note that even with the border tariffs threatened by incoming President Trump, automakers are reluctant to leave Mexico. And labor costs are only one factor. America's southern neighbor not only benefits from NAFTA but from more global free trade agreements than any other country in the world but for Israel.

The art of the deal?