By Jeff Berman / www.logisticsmgmt.com / April 4th, 2019
Amid reports this week that the White House would consider allowing trucks to continue to cross the United States-Mexico border, should President Trump go through with his pledge to close the border, in order to curb illegal immigration, various business concerns are making it clear that shutting down the border could have severe economic consequences.
The main issue being cited centers around trade to a large degree. And that does not come as a surprise, especially when considering that the total value of U.S. goods and service trade with from Mexico came in at around $1.85 billion per day, or $678 billion, and an estimated $502 billion in goods, or around $1.4 billion per day, crossed the border via truck or train in 2018, according to the U.S. Department of Commerce.
John Murphy, senior vice president for international policy at the U.S. Chamber of Commerce, said that in estimating the cost of a border closure to the economy, it would certainly likely be in the ten of billions of dollars per day, certainly much more than the $1.4 billion in daily U.S.-Mexico merchandise trade.
“Why would this be the case? Today’s lean manufacturers keep costs down by using just-in-time delivery for many parts and components,” stated Murphy in a policy paper issued by the U.S. Chamber today. “In this context, the delay of a few million dollars’ worth of inputs can force a shutdown of an assembly plant or other major manufacturing facility whose total output is orders of magnitude greater in dollar terms than the goods held up at the border. A range of other products — such as fresh produce — would face immediate losses as merchandise piles up at the border. Some of this cargo would have to be written off as a total loss.”
Murphy added that the auto and auto parts sectors, which comprise around 25% of total U.S.-Mexico trade, would be expected to close their plants one day for every day the border is closed, noting that due to the nature of each plant’s supply chain and the volume of plants they have stockpiled, some plants would shut down sooner than others. And he added that the fixed costs of operating these plants would be losses that cannot be recovered.
From a modal perspective, the U.S. Chamber said that the freight railroad sector, which depends on international trade for 35% of its revenue, would face a major impact, noting that the Association of American Railroads (AAR) estimates that 50,000 rail jobs are dependent upon global trade.
On the trucking side, the U.S. Chamber indicated it is not yet clear how closing the border to all but “commercial traffic” would work on both a legal or logistics basis.
Neil Bradley, Executive Vice President and Chief Policy Officer at the U.S. Chamber said on a conference call this week said that the nature of the U.S.-Mexico commercial relationship is not just about goods being shipped on trucks or trains, in that it is much broader than that.
“For instance, this is the most frequently crossed border in the world by a large margin, with nearly 500,000 people crossing it every day,” he said. “These people are workers or students or shoppers or tourists. There are retail establishments all along the U.S. side of the border that re heavily reliant on Mexican shoppers. That side of the business relationship really drives home that if you let trucks and trains roll through but stopping other things, there will still be very extensive harm to the U.S. economy. It is not entirely clear how that would work.”
Bradley added that there are certain actions that would be incredibly counterproductive and destructive the U.S. economy and undermine economic growth and prosperity and provide little benefit in terms of border security.
“That would include closing the southern border,” he said. “One of the things we have been talking about with our members and state and local chambers is understanding the impact that closing the border would have [on] bilateral trade, and also economic activity that we don’t often think about, when we think about the southern border.”
Another Washington, D.C.-based business group, the National Retail Federation (NRF), penned a letter to the White House today voicing concerns regarding how the ongoing threats to close the U.S.-Mexico border would hurt U.S. retailers, workers, and consumers.
“We share the administration’s goal of fixing the nation’s broken immigration system and enhancing border security,” NRF President and CEO Matthew Shay wrote in the letter. “However, there is no way to close the U.S-Mexico border without inflicting serious damage to the American economy. Closing the border for any length of time would result in significant supply chain disruptions for U.S. retailers. These disruptions would reverberate throughout the supply chain, impacting everyone from truckers to warehouse workers whose jobs depend on the two-way trade with Mexico. The end result would be job losses, factory shutdowns, increased consumer costs and reduced product availability across the country.”
In calling on Congress and the White House, and the U.S. and Mexico to continue to work together to resolve this issue, Shay stated that resorting to a border closure would be a self-inflicted wound to the American economy.
Robert W. Baird and Co. analyst Ben Hartford commented in a research note that the risk of freight disruption is material in the event of shutdown, due to the fact that Mexico is the US' third-largest goods trading partner with $611.5 billion in total goods traded in 2018 (per the USTR and US Census Bureau).
“Assessing the probability of a full (or even partial) shutdown of the US-Mexico border is difficult,” Hartford wrote. “Additionally, questions remain regarding enforcement (i.e., can attempts to address immigration or trafficking be limited to that effort and not impact commercial trade?) in the event of a shutdown. In short, we view the likelihood of a shutdown of the US-Mexico border as low -- particularly one that is prolonged. Regardless, using rhetoric and subsequent action involving tariffs during 2018 with regard to US-China trade as a template, we believe we have to view the President's threat to shut down some/all of the US-Mexico border as credible and, therefore, likely to be disruptive to freight volumes, at least in the near term.”
The analyst added that there is shipper concern regarding supply chain disruptions from the threat of a US-Mexico border closure and related advancement of raw materials into Mexico (i.e., chemicals) to raise inventory stocks in preparation for potential disruptions.
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