SNAPSHOT: US government leadership changes and inconsistent policies heighten risk of friction at southern border

In April 2019, US government leadership changes signalled a greater focus on border security, heightening the risk of friction at the US-Mexico border for commercial vehicles and passengers.

Trump

BACKGROUND

  • On 7 April, US Department of Homeland Security Secretary Kirstjen Nielsen resigned from her post. The resignation came amid mounting pressure from President Donald Trump over increasing illegal crossings of the US-Mexico border. This followed Trump withdrawing his nomination for the director of Immigration and Customs Enforcement on 5 April, telling reporters he wished to go in a ‘tougher’ direction.
  • The personnel changes follow a series of statements by Trump on possible moves to counter illegal immigration at the US’s southern border. On 29 March, Trump said there was a ‘very good likelihood’ that he would close the border over immigration. However on 4 April, Trump backpedalled on his threat, instead threatening to apply tariffs on Mexican-built cars as a means to pressure the US’s southern neighbour.
  • This also follows Trump’s declaration of a national emergency over border security on 15 February. The declaration is an effort to redirect government funding towards Trump’s proposed border wall, for which Congress has not allocated him full funding. The declaration has faced legal challenges from the opposition Democratic Party.
  • Commercial traffic at major land ports of entry has slowed since late March, after the transfer of some 750 border agents to immigration duties. Outgoing Customs and Border Protection (CBP) commissioner Kevin McAleenan said his agency was facing an ‘unprecedented humanitarian and border security crisis all along our Southwest border’.
El Paso border
Border crossing between Ciudad Juárez and El Paso

ANALYSIS

  • The heightened risk of disruption at the US-Mexico border has important implications for firms whose supply chains, assets and staff cross the boundary. A full or partial closure of the border, which in practice implies closure of land ports of entry to vehicles and pedestrians, would severely disrupt staffing and integrated supply chains. Businesses in both countries, particularly in key sectors such as the automotive industry, would be unable to source key components. Over 70 per cent of US-Mexico trade crosses the land border, with a total value of around USD1.25 billion per day. In the event of a full border closure, this would completely stop.
  • A full border closure is unlikely due to the economic costs to the US and the high likelihood of citizen unrest. Such a closure would have a severe detrimental impact on vital sectors, such as automotive and agricultural industries, on both sides of the border. In the US, this would have a particularly great impact on the economies of border states, such as Arizona, California, and Texas, as well as states with important agriculture sectors which export to Mexico. These include Michigan, Illinois, Ohio, Indiana, Nebraska, and Kansas.
  • The impact on the automotive sector, which accounts for approximately 25 per cent of US-Mexico trade, would be particularly severe. In the production of a vehicle, components and raw materials cross the border on several occasions; approximately 37 per cent of US-made car parts are shipped to Mexico, while some USD400 million worth of bilateral trade in automotive goods takes place each day. Furthermore, any disruption to production would likely lead to extended delays along the supply chain, while operations cannot be quickly restarted. According to David Cole, director-emeritus of the Center for Automotive Research, a border closure of more than two days would be ‘a major disruption’.
  • John Murphy, senior vice president for international policy at the US Chamber of Commerce, estimates that the economic cost of a closure would be in the tens of billions of US dollars per day. This is due to the knock-on effects of components being halted at the border, which could prompt the shutting down of entire factories and business operations whose production is worth much more than the items stalled at the border. Furthermore, the build-up of merchandise at the frontier would compound delays once the border eventually reopens.
  • Fresh produce exporters, particularly those from Mexico, would also face heavy losses. Furthermore, as approximately 45 per cent of the US’s fresh produce is imported from Mexico, US consumers would face large hikes in fruit and vegetable prices. Products most affected would include avocados, strawberries, tomatoes, onions, chili peppers, and cucumbers. The price of avocados in the US spiralled 44 per cent in one week amid the recent speculation about a possible closure of the border.
  • Instead of shutting the border, US efforts to reduce illegal immigration are more likely to focus on pressuring and incentivising Mexico and Central American countries El Salvador, Honduras, and Guatemala – the latter three the main countries of departure – to enhance efforts to cut border crossings. This is likely a more effective approach to reducing migrant arrivals and despite Trump’s threatening rhetoric, appears to be within the US strategy.
  • Under leftist president Andrés Manuel López Obrador, who took office in December 2018, Mexico has taken a nonconfrontational approach to Trump’s threats to the close the border. Instead, the two sides have engaged in continued cooperation at the ministerial level, while López Obrador has met with senior officials from the US administration, such as Secretary of State Mike Pompeo and senior advisor to the president, Jared Kushner, in Mexico City.
  • Mexico has already undertaken policies which seek to reduce the causes of migration since López Obrador came to power, both a result of internal politics and amid US pressure. Such measures include cutting taxes and doubling the minimum wage along the border – which seek to incentivise possible migrants to stay within Mexico – and hosting migrants while they apply for refugee status. Mexico’s interior minister Olga Sánchez Cordero has also committed to strengthen efforts to detain migrants within the country.
  • López Obrador has touted a proposed regional development plan for Mexico and Central America to further address the root causes of illegal migration, including poverty, violence and organised crime. Furthermore, Mexico has called on the US to provide USD10bn in investment in the region. The Trump administration, however, has instead cut USD450m in aid programmes for El Salvador, Honduras and Guatemala, it was announced on 30 March. Such a move, however, is likely to exacerbate the causes of migration in the long term.
  • Despite López Obrador’s reluctance to discuss Trump’s threats to shut the border, Mexican foreign minister Marcelo Ebrard has been more vocal as to Mexico’s views, tweeting on 10 April that slowing the flow of people and goods at the border is a ‘very bad idea’.
  • While a border closure is unlikely, there is likely to be intermittent disruption at the border throughout the summer if large numbers of migrants continue to travel towards it. As a result, US border officials will be redeployed to immigration duties, thus increasing wait times for cargo and passenger vehicles. This is particularly likely at the Ciudad Juárez – El Paso and Laredo – Nuevo Laredo ports of entry, which cross into the US state of Texas, and the Otay Mesa crossing in California.
  • The slowing of commercial vehicle traffic at the border has multiple implications for the supply chain. This increases costs to businesses, particularly those which carry fresh produce, and heightens the risk of incurring fines for late deliveries. Heightened costs are ultimately likely to be passed onto the consumer. In turn, this puts US-Mexico border trade at a competitive disadvantage, which is likely to favour exporters from other key markets – such as China and the EU – which use other ports of entry.
CBP
US Customs and Border Protection (CBP) agency

RESPONSE

  • Prior to undertaking an investment, firms should conduct a thorough risk assessment and design supply chains which are resilient to non-technical risks, such as a border closure.
  • Firms currently operating at the border should assess their vulnerability to a range of disruptive scenarios, developing robust and drilled contingency plans.
  • Companies should also assess their supply chain security, identifying vulnerabilities and developing comprehensive strategies to manage weaknesses. Consider the impacts of border disruption on business processes, employees, suppliers, and methods of transport, and establish measures to minimise the risk.
  • Finally, companies should monitor political developments, particularly at the national level, which impact operations at the border, and engage with a full range of US and Mexican stakeholders in the public and private sectors, which is likely to assist in mitigating disruption.
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