Trump’s Protectionism Could Harm Texas
Consumers, refineries, computer makers, and Toyota could feel the pain from new president’s proposals.
We’re only a week into Donald Trump’s presidential administration, and he already is embarking on a path that could drastically change the Texas economy. Whether you’re talking about the Toyota plant in San Antonio and its contractors, or the businesses that rely on the Export-Import Bank, or how renegotiating NAFTA might affect Texas’s status as the nation’s top exporting state, business people are nervous.
The 20 percent tax on imports from Mexico that Trump’s camp floated on Thursday could result in $12.6 billion in tariffs on goods and minerals coming into Texas. About the only bright spot for Texas business—if not for the environmental community—was Trump’s executive order clearing the way for renewed construction on the Keystone XL oil sands pipeline and the Dakota Access Pipeline. Oh, and then there is the prospect of energy secretary nominee Rick Perry bringing high-level nuclear waste to West Texas. Let’s take a stroll through the issues.
First, a look at border taxes on imports, exports, and companies that move factories out of the United States.
Trump has vowed a “border tax” on companies that move plants abroad. “A company that wants to fire all of its people in the United States, and build some factory someplace else, and then thinks that that product is going to just flow across the border into the United States — that’s not going to happen,” Trump said. “They’re going to have a tax to pay, a border tax, substantial border tax.” Trump has proposed a tax rate of 10 percent on accumulated foreign profit.
We also have to look at the “border adjustment” proposed by Republican congressman Kevin Brady of The Woodlands, who is chairman of the U.S. House Ways and Means Committee that writes the nation’s tax laws. The Brady plan would do away with the 35 percent corporate income tax and replaced it with a consumption tax called the “border-adjusted, destination-based cash flow tax.” Say that five times fast. A company that makes a product in the U.S. and sells it domestically would pay a cash-flow tax of 20 percent and no tax on a product sold overseas. But if it imported its product or parts from a foreign factory, it would pay a 20 percent tax on the import. The idea is to eliminate incentives for companies to defer taxes on an estimated $2.6 trillion in profits made overseas. This Bloomberg summary, which I drew upon, gives an even more detailed report. Trump earlier this week called the Brady plan too complicated but then quickly reversed himself to say he would discuss the proposal with House leaders.
The plans are good for keeping manufacturing plants in the Midwest, but they might be bad for oil companies that import crude or for retailers, such as Walmart, that import goods. To save jobs in the Rust Belt, Texas consumers might end up paying higher prices at their local Walmart—or, for that matter, almost any store that sells foreign-made clothing. Almost all clothing sold in the United States, including Trump’s own line, is manufactured elsewhere. That means any import tax or tariff will raise prices for consumers.
Then we have to look at one of the crown jewels of manufacturing in Texas: the San Antonio Toyota Tacoma plant, which produces about 200,000 trucks a year built by a workforce of 3,200. The plant, according to the San Antonio Express-News also has local parts manufacturers that employ another 4,000 people. Because the Texas plant could not keep up with demand, Toyota last year announced a $150 million expansion of a plant in Tijuana, Mexico. The San Antonio parts makers would be supplying the Mexico plant.
Even before taking office, Trump threatened Toyota over plans for a new Tijuana-area plant to make Corollas. “NO WAY! Build plant in U.S. or pay big border tax,” Trump tweeted earlier this month. Toyota responded by saying a border tax would impact Tacoma production, but the company would find it difficult to relocate the Mexican production to San Antonio. The tax also might have a negative impact on those parts makers in San Antonio if their exports to the Mexican plant were taxed or sales from the plant dropped because of tariffs. Toyota provided me a statement on the Brady border adjustment plan:
We deeply believe in the benefits of open international trade and fair competition. In that same spirit, we also believe that a Border Adjustability/Adjustment Tax (BAT) is essentially a hidden consumer tax that would negatively impact nearly every U.S. industry. No automaker today would be immune, domestic or import, and Toyota is no exception. We look forward to working with the new administration and Congress to support equitable business and tax policies that work to help grow the economy.
The Texas governor’s office reports that imports from Mexico into the state totaled about $90.1 billion in 2014 and represented 29 percent of all imports. A state Department of Transportation study reported that imports of electronics and machinery from Mexico in 2013 was $38 billion, and imports of minerals, including oil, totaled $25 billion. A 20 percent tariff on that activity could cost Texas businesses and consumers about $12.6 billion in taxes.
Essentially, it boils down to whether Texas consumers and businesses are willing to pay higher prices to save Rust Belt jobs and possibly halt the loss of manufacturing jobs to other countries. Even last fall, some traditional Republicans such as the Koch brothers were objecting to the Brady plan. Koch Industries has several large refineries in Texas.
Other areas we need to examine are trade deals, the Export-Import Bank and the border wall.
With his policy of “America first,” President Trump quickly put his signature on a form of economic isolationism by pulling the United States out of the Trans-Pacific Partnership and declaring a desire to renegotiate the NAFTA. Also in signing an order to build a “wall” on the border, Trump signaled that he might force Mexico to pay for it by withholding financial aid to our neighbor to the south, asking “the head of each executive department and agency” to “identify and quantify all sources of direct and indirect Federal aid or assistance to the Government of Mexico on an annual basis over the past five years.” However, in the ever shifting sands of Trump land, the very next day, he proposed the 20 percent tax on all imports from Mexico.
While Trump’s actions probably please anti-globalists, unions such as the AFL-CIO, they have upset Mexican officials, and Texas businesses that are dependent on trade are understandably worried. Mexican President Enrique Peña Nieto cancelled a trip to Washington after Trump tweeted that Mexico should pay for the wall. Economy Minister Ildefonso Guajardo said Mexico might withdraw from NAFTA if it is renegotiated to Mexico’s disadvantage. “The strategy for this treaty needs to be one in which everyone wins. It’s impossible to sell it here at home if there aren’t clear benefits for Mexico.”
You need look no farther than Laredo to know NAFTA has been good for Texas. The city’s population boomed from a pre-NAFTA total of 133,000 to 255,000 today. The Associated Press reported last fall that 14,000 tractor-trailer rigs cross the border here every day. The International Trade Administration of the U.S. Department of Commerce reports that $248.2 billion in goods and products were exported from Texas, with $92.4 billion of that going to Mexico, followed by $25.5 billion to Canada and $11.5 billion to China. Computers and electronics were the top export, with petroleum and coal running a close second.
Not only is Trump targeting NAFTA for renegotiation, he also is adding his weight to Republican efforts to eliminate the Export-Import Bank, which the tea party faction considers corporate welfare. The Ex-Im Bank, as it is known, guarantees bank loans for businesses that want to trade in foreign markets and only pays out when loans default. The total export value of loans guaranteed by the bank from 2013-17 has been $21 billion, much of which went to major oil drilling and construction companies for the export of equipment. The top three export destinations were Mexico, Colombia, and Australia. While some of the loan guarantees run into the hundreds of millions of dollars, one of the smaller ones was, oddly, just $962 for Dell computers in Austin.
Some of the Ex-Im Bank’s toughest opponents are Texans, though. A fight against reauthorizing the bank last year was led by Republicans, Representative Jeb Hensarling of Dallas and U.S. Senator Ted Cruz. As governor, Rick Perry was a supporter of the bank, but switched positions before his unsuccessful 2016 run for the Republican presidential nomination. In a 2015 editorial in the Wall Street Journal, as reported by the Texas Tribune, Perry said he had supported the bank because “shutting down the Ex-Im Bank would mean unilaterally disarming in a fight that Europe and China intend to win.” As a presidential candidate, though, he wrote, “We can’t let Ex-Im get in the way of reforms that would expand opportunity for all Americans.”
The bank’s charter was reauthorized last year, but Congress did not confirm any appointees to its board. Congress also limited loan guarantees to $10 million, substantially lowering its effectiveness. Bank Chairman Fred Hochberg told the Houston Chronicle earlier this month he believed opposition to the bank is purely political posturing. “They were very invested in calling this corporate welfare,” he said of Republicans, “so if we cut corporate welfare, we can now cut social welfare.”
The Texas Association of Business, essentially the statewide umbrella of Chambers of Commerce, favored the Trans-Pacific Partnership, NAFTA, and supported keeping the Ex-Im Bank. “We don’t know what we’re facing yet. There’s a lot of uncertainty,” TAB President Chris Wallace told me. With Texas as the nation’s leading exporting state, Wallace said it is important for the United States to have a spot in negotiating trade pacts because the devil always is in the details of the rules. “We need to have a seat at the table to make sure we have a level playing field for [Texas] businesses.”
But there are silver linings for some Texas businesses. Trump’s order clearing the way for construction of the controversial Keystone XL and Dakota Access pipelines could guarantee a steady supply of crude oil products for Texas refineries. Environmentalists had opposed the Keystone project, while members of the Standing Rock Sioux claimed the Dakota Access pipeline would endanger their water supply. The Dakota pipeline is being built by Energy Transfer Partners of Dallas.
As we wrote in our new vertical, the Energy Department, oil already is flowing through the Texas portion of the Keystone project. A 487-mile pipeline from Cushing, Oklahoma, to Nederland, Texas, began operations two years ago, and a Houston segment of the pipeline began sending crude to a Houston terminal last year. The lines have the potential to supply 1.5 million barrels a day to Texas refineries. At present, the oil is just light crude coming from Midwestern and mountain states.
While not exactly a policy position, Trump’s appointment of Rick Perry as secretary of energy puts the former Texas governor in a position of promoting various aspects of the energy industry. Perry can advocate for oil and gas and renewable energy such as wind, but he will have a more direct say in whether high level nuclear waste is stored in far West Texas.
The company that operates the low-level waste site in Andrews County and is exploring disposal of high level waste belongs to a holding company owned a family trust of the late Harold Simmons. The Department of Energy, which Perry will head, has authorized test wells to be drilled at the Andrews County site and two others in South Dakota and New Mexico to see if they would be suitable repositories for the high level spent nuclear rods that are now kept at refineries around the nation. Simmons was once among the top donors to Perry.
Texas in the 1980s had been opposed to locating a high-level nuclear waste site in Deaf Smith C, but the issue faded as the nation focused on Yucca Mountain in Nevada. However, that project was dropped in 2011, reopening the national search for a waste site. Perry started advocating for Texas to join a state race for waste.
“We have no choice but to begin looking for a safe and secure solution for [high-level waste] in Texas—a solution that would allow the citizens of Texas to recoup some of the more than $700 million they have paid toward addressing the issue.”
Projects like this one have a lead time of years, but Perry could influence whether Texas leads the nation in accepting high-level waste. So far, there is no substantial opposition to the project.
While there are a few economic bright spots in Trump’s early plans for Making America Great Again, the overall burden on Texas will be heavy, especially if Trump gets his 20 percent tariff on imports form Mexico. If the current proposals are enacted, Trump could be very bad for Texas business.