Impact of Donald Trump's Decisions As President to Embrace
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1 Erasmus University Rotterdam MSc in Maritime Economics and Logistics 2016/2017 Impact of Donald Trump’s Decisions as President to embrace protectionism on the Mexican Automotive Industry by Juan Carlos Martinez Chiunti Copyright © Juan Carlos Martinez Chiunti 2 Acknowledgments The author expresses sincere appreciation to family members, friends and colleagues for their support. They have contributed both indirectly and directly into seeing that this study is complete. In a special way, I would like to offer gratitude to my professor, Ted Welten, whose input has been immeasurably valuable and has gone to great length to ensure I grasp the concept and put them down methodically. Sincere thanks. 3 Abstract Donald Trump has been passionate about reclaiming the greatness of the United States and his first days in office have marked radical policies and the fear of more. For instance, he has proposed that he will impose a 35% tariff on all vehicles that are exported from Mexico. Mexico, on the other hand, depends much on the automotive industry because it provides employment, sustains the GDP and runs the maritime sector in Mexico. Many firms operating in Mexico have an origin in U.S.A. Most exports are also destined to the same country from Mexico. With the introduction of cross border tariff, many firms will be affected and many jobs will be lost. This research was aimed at measuring the impact of the Presidency of Trump on the bilateral trade between the United States and Mexico. Through the use of CES model, this study showed that employment, maritime sector and economic welfare of Mexico will be adversely affected by moderate to the adverse decision that Donald Trump will make on a bilateral trade. The results showed that there is projected a loss of jobs, reduced trade balance, and decrease in economic welfare. Employment would decline by -0.77 under moderate scenario whereas, under the worst scenario, the rate of the employment will be -3.72 which a decrease from -0.02 to -0.77. The effects mean that there will be fewer people employed in the automotive sector. Maritime and economic welfare will also decline in the same manner. 4 Table of Contents Abstract .......................................................................................................................... 3 List of Tables .................................................................................................................. 6 List of Figures ................................................................................................................ 7 List of Abbreviations ..................................................................................................... 8 1. Introduction ................................................................................................................ 9 1.1 General Context ..................................................................................................... 9 1.2 Research Questions and Objectives .................................................................... 11 1.2.1 Questions ....................................................................................................... 11 1.2.2 Objectives ...................................................................................................... 12 1.3 Relevance ............................................................................................................ 12 1.4 Thesis Structure ................................................................................................... 14 2. Literature review ...................................................................................................... 16 2.1 Theoretical Framework ......................................................................................... 16 2.2 Trump’s Presidency .............................................................................................. 17 2.3 Trump’s policies ................................................................................................... 17 2.3.1 35% tariff on imports of automobile and their parts to US from Mexico ......... 17 2.3.2 Building wall along US-Mexico border ........................................................... 18 2.3.3 Immigration .................................................................................................... 19 2.3.4 Protectionism ................................................................................................. 19 2.3.5 NAFTA ........................................................................................................... 25 2.4 The Economy of Mexico ....................................................................................... 26 2.4.1. Economy ....................................................................................................... 26 2.4.2 Automobile Industry ....................................................................................... 27 2.4.3 Imports and exports ....................................................................................... 29 2.4.4 Overview of automobile parts market in Mexico ............................................ 32 2.4.5 Barriers and challenges facing the automobile export in Mexico ................... 33 2.4.6 Employment in the Mexican automobile industry .......................................... 34 2.5 Maritime sector ..................................................................................................... 34 2.5.1 SIEM Car Carriers ......................................................................................... 35 2.5.2 Nippon Yusen Kabushiki Kaisha RORO ........................................................ 36 5 2.5.3 Primary Ports of Automotive Imports and Exports in Mexico ......................... 38 2.5.4 Port of Veracruz ............................................................................................. 39 2.5.5 Lazaro Cardenas Port .................................................................................... 40 2.6 Existing research on the influence of policy change on trade with other countries ................................................................................................................................... 41 2.6.1 Brexit .............................................................................................................. 41 2.7 Literature overview of similar policy questions ..................................................... 43 2.8 Conclusion and theoretical relationship between Trump’s Presidency and Mexican Economy ...................................................................................................... 44 3. Methodological Approach ....................................................................................... 47 3.1 Choosing the Constant Elasticity of Substitution (CES) Model ............................ 47 3.2 This Model is Homothetic ..................................................................................... 47 3.3 Compatibility with Various Special Demand Systems .......................................... 47 3.4 CES Model ........................................................................................................... 47 3.4.1 CES Model Introduction ................................................................................. 48 3.4.2 CES Model Analysis ...................................................................................... 49 3.5 Data ...................................................................................................................... 50 3.5.1 Raw Data Gathering ...................................................................................... 51 3.5.2 Data Input ...................................................................................................... 51 4. Results and Analysis ............................................................................................... 52 4.1 Cost Function CES ............................................................................................... 52 4.2 Manufacturing Sector Employment ...................................................................... 56 4.3 Contribution of Automotive Industry to GDP ........................................................ 57 5. Conclusion ............................................................................................................... 59 5.1 Implications ....................................................................................................... 59 5.2 Research results .................................................................................................. 61 5.3 Limitations ............................................................................................................ 62 5.4 Future Research ................................................................................................... 62 References .................................................................................................................... 63 Appendices ................................................................................................................... 68 Appendix 1: Production Capacities ............................................................................ 68 6 List of Tables Table 1: Global Car Transport Fleet Ranking……………..…..………………………..….59 Table 2: Moderate Potential Impact on Employment ……………………..……..…….....83 Table 3: Moderate Potential Impact on Maritime Sector ……….....………………….…..84 Table 4: Moderate Potential Impact