President Donald Trump again threatened to close the southern border with Mexico, but could doing so start or push the U.S. economy closer to a recession, upending his chances at reelection?
According to Forbes, there were $346 billion in goods imported from and $265 billion in goods exported to Mexico during 2018, an average of $950 million in imports and $725 million in exports per day.
Import and export figures don’t tell the entire story regarding a complex economy, but Forbes says the numbers themselves are large enough to throw the U.S. economy into a tailspin — which means closing the border is likely an empty threat from Trump.
Shutting down the border, Forbes says, means Trump would be going against his own self-interests, which is highly unlikely.
Impact on imports and exports
December quarter’s nominal GDP on an annualized basis was $20.9 billion or $5.2 billion in the quarter. It appears the economy grew around 2% in the March quarter, which would put the recently ended quarter’s nominal GDP at $5.3 billion.
For the June quarter forecasts call for about 2.5% growth. The March and June quarter’s growth rates mean that there should be about $5.45 billion in GDP in the second quarter, which would be an incremental $133 billion above the March quarter.
On a daily basis this is an incremental $1.5 billion in GDP growth, or a bit less than the amount of Goods that the U.S. imports and exports with Mexico every day ($1.675 billion). Assuming that all trade came to a halt then closing the border could effectively wipe out all of a quarter’s GDP growth, and this is before any other impacts are taken into account.
Ripple impacts beyond trade numbers
The actual economic impact could be two times, three times or even more as supply chains are disrupted (think of companies having to air ship vs. using trucks to deliver critical parts and supplies for end products such as cars which are worth a lot more than the parts being imported), manufacturing lines shut down due to just in time deliveries not making it, employees being laid off as production slows or grinds to a halt and stores not having the goods to sell that they get via the border.
This would then cause a ripple effect similar to the government shutdown since the stores and restaurants don’t have sales due to unemployed people not visiting. While it could impact the border states the most, it would have an impact across the country.
Assuming that the result from shutting down $1.675 billion in imports and exports gets the economy to have no growth just on their own, then the other disruptions could throw the economy into a recession.
Investors don’t believe Trump
The Dow Jones Industrials, S&P 500 and the NASDAQ Composite Indexes are all up over 1% on Monday after having a very strong March quarter. The strength is probably due to economic numbers out of China and the U.S. coming in better than expected.
Trump has threatened shutting down the border with Mexico multiple times, so it appears investors are looking at him crying wolf again. However, if he does go through with his threat, there should be a large negative reaction in the markets. This is probably one of the few factors that will keep him from going through with this.