Hoosiers take note. Indiana could be one of the biggest losers from the burgeoning trade war with Mexico.
President Trump is set to place a 5% tariff on all Mexican imports on June 10, and raise those tariffs to 25% by October, unless Mexico stops the flow of Central American migrants into the United States. If this new round of tariffs is implemented, it will raise costs for producers, lower returns for investors, raise prices for consumers, and destroy jobs.
This is especially worrisome for Indiana, which relies more heavily on world markets than all but six other states. In 2018, Indiana imported $4.5 billion worth of goods from Mexico, accounting for 7.3% of our state’s $61.7 billion in total imports. A 25% duty would translate to $1.1 billion in tariffs that will inevitably harm Indiana’s manufacturing sector, which is highly reliant on global supply chains and foreign trade.
The automobile industry is especially at risk. In dollar value, Indiana’s largest import bill from Mexico is for car parts. American-made cars are composed, on average, of more than 50% foreign content.
The globalization of the industry makes the distinction between American-made and foreign-made cars increasingly irrelevant. Parts are sent back and forth across the border, often several times, as components are integrated into a completed car.
The tariff will significantly raise production costs, undermining the competitiveness of American automobile companies, and put thousands of Indiana workers’ jobs in jeopardy. Deutsche Bank estimates a 25% tariff will increase automobile prices $1,300 and reduce demand 18%.
Manufacturers of aeronautics, electronics, appliances and many other products are similarly affected by tariffs. Estimates vary, but a 25% tariff could slow economic growth in Indiana as much as 0.7% next year.
Making matters worse, Mexico is already warning of retaliatory tariffs on American exports. After China, Mexico is the largest destination for Indiana exports. Last year, Indiana exported $5.4 billion worth of goods to Mexico, which accounted for 1.5% of Indiana’s total GDP. More than 95,500 jobs in Indiana depend on trade with Mexico. Retaliatory tariffs would hit Indiana’s already beleaguered farmers and ranchers particularly hard.
Uncertainty surrounding foreign trade policy is the single greatest threat to the U.S. economy right now, and an international trade war has the potential to cause a recession. The impact would be felt first—and the fallout would be most severe—in the Midwest.•
Bohanon and Curott are professors of economics at Ball State University. Send comments to [email protected]