Question: Part of the goal of NAFTA (and its successor) was to economically integrate the North American economies. On April 2, President Trump imposed wide-ranging tariffs on just about everything imported into the US. Included are automobiles manufactured in Mexico and Canada. The next day, April 3, Stellantis (who owns Chrysler, Jeep, and other brands) announced they were idling factories in Canada and Mexico, as well as temporarily laying off 900 workers at their Detroit powertrain and stamping plant. Why would tariffs on Mexican and Canadian cars lead to layoffs in American automobile plants?
(The answer is below, dear reader. If you would like to take a shot, stop here and continue on when done).
Answer: The Detroit plant makes parts of the Canadian and Mexican factories. Powertrain and stamping are inputs that are just shipped to Mexico/Canada and assembled there. By increasing the cost of Mexican/Canadian cars, thus reducing the supply, the tariffs have reduced the demand for American-made automobile parts, leading to the layoffs. The tariffs that supposedly were to create jobs for American workers is actually reducing their jobs.
Explanation: Thanks to NAFTA, and globalization in general, North American economies have become more vertically specialized. Consequently, that means that American, Mexican, and Canadian manufacturing plants have become complements to one another, not substitutes. An increase in price of one good reduces the demand for its complement. The reduction in demand, thus, leads to lower demand for workers, leading to the temporary layoffs.
READER COMMENTS
Mactoul
Apr 4 2025 at 10:29pm
When the economists tell us that all trade is between individuals then why do they invite mischief by totalling exports and imports and calculating trade deficits and surpluses between countries?
Great deal of trouble may be avoided by simply not having the data. God did indicate it when he punished Davidic kingdom of conducting census.
Jon Murphy
Apr 4 2025 at 10:51pm
The balance of trade is a holdover from a different time.
Warren Platts
Apr 5 2025 at 4:51am
Here’s an exam question for you Jon: Explain the difference between mercantilism and protectionism.
Jon Murphy
Apr 5 2025 at 11:22am
Please stay on topic. Do you have an answer you wish to share?
Thomas L Hutcheson
Apr 7 2025 at 9:06pm
I think “mercantilism” seeks a surplus of trade, inflow of “gold.” The idea behind it was I think to have reserves whihc could be used to pay mercenaries and buy supplies for making war. What was exported to obtain the “gold” was irrelevant.
“Protectionism” has an economic rationale that certain forms of production have some kind of value that goes beyond their value when sold and enough so that their production must be made profitable even if the same or similar goods or service can be obtained at less expense from abroad. A surplus of aggregate exports over imports is not the objective (which is fortunate becasue the instrument usually chosen to “protect,” a tariff, cannot by its nature alter the trade balance).
Luis
Apr 5 2025 at 11:54am
More blogs like these please.
Manfred
Apr 5 2025 at 5:25pm
Jon – this was a great lesson in (international) economics. Very much like the price theory questions by Bryan Cutsinger. Like Luis said, more like this, please.
Jon Murphy
Apr 5 2025 at 6:04pm
Sure thing. I’m teaching International Trade this semester, so as more exam questions come to me, I will post them (post exam, of course, in case any of my students are reading).
Thomas L Hutcheson
Apr 7 2025 at 9:13pm
I suggest one whose answer depends on the Lerner Theorem.
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