A central theme running through Donald Trump’s rhetoric, both before and after he won the White House, has been the idea that Mexico is stealing American jobs and that the policies of a Trump administration will be just the thing to bring them back. On Tuesday, though, former Treasury Secretary Larry Summers said that so far, the actions of the new president are having the opposite effect.
Since winning the election, Trump has continued to promise to rewrite the North American Free Trade Agreement, to build a border wall, and to punish companies that make products in Mexico for sale in the US. He has even gone as far as berating individual companies in an effort to pressure their CEOs to call off plans to move jobs south of the border.
He has publicly feuded with Mexican President Enrique Pena Nieto over who will pay for the wall. After Pena Nieto’s very public refusal to agree to fund the construction and to meet with Trump in Washington, White House Press Secretary Sean Spicer even floated the possibility of imposing a punitive tax on all goods imported to the US from Mexico.
The net effect of all this news has contributed to a decline in value of the Mexican peso relative to the US dollar. (Though it has recovered somewhat in the past two weeks, the valuation of the peso against the dollar remains at historically low levels.)
That, Summers said in an appearance on CNBC’s Squawk Box Tuesday morning, “works out in a counterproductive way” because it increases Mexico’s appeal to companies looking to relocate or expand operations.
“That means anybody thinking about locating in Mexico now has a 15 percent cost advantage,” Summers said. “That 15 percent is huge relative to what he's accomplished yelling at a few CEOs.”
Summers’ numbers may be a bit off. The value of the peso is down a little more than 12 percent since Election Day. However, the reduced costs are still substantial.
Summers also criticized plans being floated by the Republican Congress and the White House to implement a “border adjustment tax” that would substantially raise the cost of import while exempting exports from taxation.
“If we do the border adjustment, my guess is that the dollar will rise substantially,” Summers said, which would cushion importers somewhat from higher costs but would also have broad global effects for debtors with loans denominated in dollars.
“I don't think it's a very good idea because I think it will cause financial problems all over the world because all kinds of dollar debtors will be hugely burdened,” Summers said.