Throwing economic sensibilities and consensus to the wind, the Trump Administration is pursuing significant tariffs on products from Mexico, one of America and Kentucky's largest trading partners. Late on the evening of the 5th, the President announced in a tweet that “not nearly enough” progress had been made during discussions between the two countries and that “if no agreement is reached, Tariffs at the 5% level will begin on Monday, with monthly increases as per schedule.”
This is a devastating prospect for Kentucky's economy, which is in one of its strongest positions in state history. Comparing analysis by the New York Times using Bureau of Economic Analysis data, as well as Census Bureau data analyzed by us at Pegasus Institute, Kentucky will be one of the hardest hit states in America if tariffs on Mexico are imposed.
Mexico is Kentucky's second largest import partner, with Kentucky businesses and individuals bringing in $6.77 billion in goods in 2018. That represented an increase of more than 20 percent over 2017 numbers when Kentucky imported just under $5.6 billion in goods from Mexico. After two straight years of increases, we could expect that number to rise again in 2019 based on consistent manufacturing growth and overall economic strength, but even if held constant a 5 percent tariff would mean a $338.5 million a year ($28.2 million per month) increased expense on Kentuckians. Should tariffs increase to 25 percent, as the President has threatened the rate could be by October, that would mean nearly $1.7 billion in additional expenses.
This would unquestionably mean layoffs, decreased production in signature industries, and increased costs for consumers across the board.
The industry most likely to be impacted by this will be automotive, which rely heavily on imported products, as evidenced by Michigan's nation-leading reliance on Mexican imports. At present, Kentucky's automotive industry employs more than 95,000 individuals across 500 establishments. Kentucky exports approximately $5.4 billion a year in cars and parts, making it one of the largest sectors of the state's economy. Even using conservative estimations of possible production decreases could mean raising Kentucky's unemployment rate by several decimal points. The rate is currently matching its all-time low, even with one of the largest labor markets in state history.
As a percentage of overall GDP, Kentucky's imports from Mexico represent 3.2 percent of the overall economy, based on analysis by the New York Times. That trails only Michigan (10.5 percent), Texas (5.9 percent), and Rhode Island (4.1 percent).
As a percentage of total imports however, the cause for concern is elevated even higher. The previously referenced $6.8 billion in imports from Mexico represents 12.4 percent of the more than $54 billion in total imports into the Commonwealth.
There is no reasonable economic argument that makes this a positive scenario to Kentucky. Lawmakers should act accordingly, and work to prevent tariffs on Mexico from taking effect.