A sustained hard closure of the U.S. border with Mexico would trigger a recession in both the United States and Mexico within six months. It’s important to note that the auto industry directly employs one million individuals and accounted for 0.7 percent of the real value added to the U.S. economy in 2017. Thus, the multiplier effects of a border shutdown would be enormous and sufficient to tip the domestic economy into recession. Given experiences with downturns in the Mexican economy, a border closure would result in a net increase in illegal migration and in remittances to Mexico. Currently those remittances stand at roughly $23 billion annually, below the cyclical peak of $31 billion. Under such a situation, remittances would certainly increase well above the cyclical high in the near term.
Instituting a border closure would strike at the heart of the real economy in general and the auto-manufacturing ecosystem in particular, severely curtailing middle market manufacturing firms with exposure to the sector. |
Instituting a border closure would strike at the heart of the real economy in general and the auto-manufacturing ecosystem in particular, severely curtailing middle market manufacturing firms with exposure to the sector. According to the Center for Automotive Research, an independent research institute estimates that an auto company loses about $1.3 million for every hour an assembly line is down. The Center estimates that a shutdown of all 54 major U.S. auto assembly lines would cost $5.6 billion per week. The burden of adjustment would almost certainly be borne by the small and medium-size firms that populate the broader auto ecosystem.
A multinational supply chain
It is important to put all of this in context. Last year U.S. imports to Mexico were approximately $346 billion, while exports exceeded $265 billion. The transportation ecosystem was characterized by intensive trade of roughly $153 billion—$120 billion to the United States and $33 billion to Mexico—all which point to the de facto integration of the economies participating in the North American Free Trade Agreement. Data from 2017 indicate that approximately $50 billion represented auto parts and $64 billion was finished vehicles. Auto production accounts for more than a quarter of the bilateral trade in goods between the United States and Mexico. Automotive components typically cross the border eight times during the assembly process, thus creating a true multinational supply chain indicative of the broader global auto supply chain that defies narrow national definitions.
The United States conducts more than $1 million in cross-border activity every minute of every day with Mexico.
The United States conducts more than $1 million in cross-border activity every minute of every day with Mexico. Beyond the current threat to shut down the border, the administration is currently threatening to impose a 25 percent tariff on all auto imports, which would be equivalent to a $90 billion tax on U.S. producers and consumers. Our colleagues at London-based IHS Markit have estimated that the imposition of taxes on auto imports would result in a $290 billion drag on GDP over the next decade, with deadweight losses to overall economic activity of $22 billion in 2019 and $31 billion in 2020.
On a regional basis, the states of California, Texas, Arizona, New Mexico and Utah would suffer the brunt of the immediate damage. In addition, the auto-producing states in the upper Midwest and across the Southeast would also face a difficult economic transition if there were a sustained border shutdown.
As such, we anticipate widespread bipartisan opposition to closing the southern U.S. border and to broader auto tariffs. Such a move would almost certainly kill the NAFTA modernization legislation pending before Congress and create a noticeable drag on international economic growth, given the fact that the auto supply chains are global in orientation.