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Is This Another Smoot-Hawley?

There are economists who say that NAFTA has caused the loss of countless jobs to the lower-cost environments in Mexico, and that these jobs will come back in a post-NAFTA trade environment. They argue that instead of doing nothing, the US should take every opportunity to raise all import tariffs, eliminate trade agreements, and close the borders to immigrants and trade. This, some say, will make America competitive, even though there is no gain in productivity or cost reduction in American manufacturing.

What they may be forgetting is that the US has gone down this pathway before with the Smoot-Hawley Tariff Act of 1930, which raised tariffs on about nine hundred products Historians blame Smoot-Hawley for triggering the Great Depression of the 1930s. They point out that Smoot-Hawley caused sharp increases in consumer prices, which led to consumers buying fewer products, which in turn led to low demand, lay-offs, high unemployment, and ultimately, the stock market crash.

For sure, NAFTA has its problems. The import/export paperwork required to track goods moving across the borders and the associated record-keeping can be onerous. Special rules for truckers from Mexico have taken a toll on American truckers, and the effects don’t end there. But overall, most economists think NAFTA has had a net positive effect on the US economy.

Trade Wars

Another concern is the likelihood of a trade war with Mexico and other countries. If tariffs are raised on imports to the United States, or if the proposed Border Adjustment Tax is imposed, our trading-partner countries are likely to raise tariffs on imports coming into their countries. Take fruits and vegetables for example. More than six billion pounds of fruits and vegetables were imported from Mexico in 2015-2016. Mexico provides 70% of fresh fruits and vegetables consumed in the United States. Corn and soybeans from American farms move the other direction into Mexico. If a tariff is placed on fruits and vegetables from Mexico, and Mexico retaliates with a tariff of their own, American consumers will suffer from higher prices, and American farmers will find it harder to compete for business in Mexico.

Mexico and the United States trade much more than food products. In fact, industrial products are the largest sector for imports from Mexico. Manufacturing operations vary from Electronics Manufacturing Services (EMS), Contract Manufacturing (CMs), Original Equipment Manufacturing (OEMs), and Maquiladoras.

What’s Next?

A radical change to tariffs on Mexican imports and a renegotiation of NAFTA or outright withdrawal from the treaty could cause much turbulence in the US economy. It could disrupt cross-border supply chains and transform import and export patterns with Mexico. It is unlikely to improve heartland and rustbelt manufacturing jobs that Trump has promised his voters he would bring back. In fact, the United States and Mexico have such tightly interconnected economies that increased tariffs and trade barriers would likely end up causing more job losses all along the US-Mexico border.

And the turbulence doesn’t stop there. Americans will likely end up paying more for everything coming from Mexico or manufactured in higher-cost American factories.  Buckle your seatbelts.

 

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Cof O UkraineIf you are an importer, you know the importance of US Customs regulations regarding Country of Origin markings. The regulations are in place so that US consumers can be informed about the origin of the products they buy. You can find C of O markings on adhesive stickers attached to products, on imported food labels, on soft labels in apparel and on the outside of a shipping carton or crate. But what happens when one country takes over another? How should the rules of origin apply?

Customs and Border Protection support the US government’s political position in this matter with the enforcement of C of O regulations. Take for example, the current and very serious dispute over the Crimean Peninsula between Russia and the Ukraine. The US government has taken a clear stand against Russia and one of the ways is through C of O marking requirements. CBP requires products of Crimea to be marked with Country of Origin: Ukraine. This is a very significant point being made by the US government. Goods coming from the Crimea cannot be labeled “Made in Russia” because the US government does not recognize the Russian government there.

On April 28, 2014, the White House issued a press release announcing the implementation of further sanctions against Russia including export restrictions for high-technology goods, subject to the Export Administration Regulations (EAR), which could contribute to Russia’s military.

The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) also announced that, effective immediately, they will “deny pending applications for licenses to export or re-export any high technology item subject to the EAR to Russia or occupied Crimea that contribute to Russia’s military capabilities.” Existing export licenses meeting these conditions will be subject to revocation.

Supply chain professionals often discover that the real reason for a trade law or country regulations is political, not economic. The laws are enforced to further the agenda of the importing country, in this case the US. For the US and Ukraine, this means supporting the Ukrainian government in their fight to keep Ukraine independent.