"It would be huge": U.S. border town confronts possible import tax

[February 16, 2017]  By Lisa Baertlein and Paul Ingram

NOGALES, Arizona (Reuters) - For up to 16 hours a day, tomatoes, peppers, cucumbers and mangoes grown in Mexico flow north through a border checkpoint into Nogales, Arizona, helping to ensure a year-round supply of fresh produce across the United States.

This is a city built on cross-border trade.

Each year, some 330,000 trucks and 75,000 train cars carrying $17 billion worth of goods move through Nogales, according to U.S. Customs and Border Protection. Economists estimate trade supports nearly one in three jobs here, ranging from workers who inspect the goods to forklift operators who unload them in distribution centers.

In many ways, Nogales represents the flip side of free trade deals that have battered industrial cities in the Midwest, where jobs have been outsourced and manufacturing plants shut down. The cities where Donald Trump's promise to throttle what he calls unfair competition resonated most profoundly during the presidential campaign.

It also represents potential risks that new trade barriers could pose for businesses and residents along the border. Only a tall, rusted fence separates Nogales, Arizona, from Nogales, Mexico; the cities are so intertwined that locals call them by a single name, “Ambos Nogales” or “Both Nogales.”

Now in office, Trump is considering a 20 percent tax on imports from Mexico, one of several ideas under review in Washington, and is promising to renegotiate the North American Free Trade Agreement.

More than a dozen city officials, employers and workers interviewed here said a border tax, if enacted, could choke the flow of imports from Mexico. They described a chain of events that would harm the economy, threaten local jobs and lead to higher prices for U.S. consumers.

“President Trump should take a good look at the effects of whatever he does, because he’s going to end up with a real problem,” said Nogales Mayor John Doyle, who joined other lawmakers from Arizona, New Mexico and Texas in denouncing the import tax plan in letters to U.S. lawmakers.

Food, autos and electronics go both ways across the border checkpoint, sometimes more than once. Mexican mangoes and melons come north while California almonds and apples from Washington state go south. U.S. car parts sent to Mexican factories are imported back as finished vehicles.

"There are hundreds of products that come back and forth through the port of entry in Nogales,” Doyle said.

The Trump administration told Reuters that any tax deal would protect U.S. interests.

“The American people can rest assured that any policy President Trump pursues will be designed to increase wages for American workers, reduce the U.S. trade deficit, and strengthen the economy so that it works for all,” a White House official said in an email.

TIED TO TRADE

Since the 1994 implementation of NAFTA, trade between Mexico and the United States has risen more than six fold. Each country exported about $40 billion to the other in 1993. Last year the United States imported $294 billion in goods from Mexico and exported $231 billion back, U.S. Census data show.

Nationwide, nearly 5 million jobs are now tied to trade with Mexico, from importers to jobs dependent on low-cost goods, according to a study by the non-partisan Wilson Center’s Mexico Institute.

In Santa Cruz County, surrounding Nogales, the produce import industry and supporting businesses account for more than 22 percent of jobs, according to a 2013 report by economists at the University of Arizona. Trade and support for factories across the border account for another 10 percent of the workforce.

The report's lead author, Vera Pavlakovich-Kochi, said a 20 percent border tax would create the strictest barriers to trade in five decades.

In addition to Trump's proposal of a 20 percent tax on imports from Mexico, Republican lawmakers have put forth a plan that would cut corporate income tax to 20 percent from 35 percent, exclude export revenue from taxable income and impose a 20 percent tax on imports.

Workers unload shipments of vegetables from Mexico at SunFed produce packing and shipping warehouse in Nogales, Arizona, U.S., January 30, 2017. REUTERS/Lucy Nicholson

The proposals have split Corporate America.

A group of major exporters including Boeing Co, General Electric Co and Pfizer Inc have formed a coalition to support the import tax. At the same time, large retailers, including Target Corp and Best Buy Co Inc, have countered that such a tax would raise consumer prices and hurt their businesses.

UNINTENDED CONSEQUENCES

Seated in his second-floor office in a warehouse nestled in the rolling hills on the outskirts of town, produce trader Jaime Chamberlain said business with Mexico is the lifeblood of Nogales, which brings in more pounds of Mexican produce than any other U.S. border town.

It’s “one of the largest industries here with the most employment and the most to lose,” said Chamberlain, a board member of the Fresh Produce Association of the Americas. He voted for Trump and his pro-business, socially conservative agendas, but is lobbying state leaders to oppose the tax.

Chamberlain’s parents began the family business with a $1,000 loan in 1971. He and his sister now own J-C Distributing Inc, which employs about 25 people who handle 120,000 pounds of Mexican tomatoes each week for Taco Bell in addition to orders for major companies such as Kroger Co and Sysco Corp.

The company warehouse is among more than six dozen such facilities on Interstate 19, just a few miles north of Nogales’ town square. In all, they bring in fruits and vegetables worth $3.3 billion a year, according to the Fresh Produce Association.

Local officials, residents and economists warn that a tax could reverberate across the local economy. For example, a 20 percent border tax could put some of the $17 million in produce trade-related fees on custom brokerage, freight forwarding and truck permits at risk.

“There are a lot of unintended consequences with this,” said Santa Cruz Board of Supervisors Chairman Manuel Ruiz. “There are domino effects all over. ”

Many local business people expect Mexico to fight back.

“A 20 percent tax could start a trade war with Mexico. I don't see how we can impose that unilaterally,” said Ricardo Crisantes, vice president of marketing and sales at Wholesum Harvest, which is part of a Mexico-based company that has offices in Nogales and organic farms on both sides of the border.

Company representatives said a border tax could drive the company to shift more farming to the United States, but it also could send import demand to other parts of Latin America that would bypass Nogales.

Restaurant and store owners say the tax would make already tough times even worse.

“It would be huge,” said Karla Galindo, 35, who owns Rancho Grande restaurant in Nogales with her husband.

She and other local business owners said sales have already been hurt by the war of words between officials in Mexico and the United States. “People are afraid to spend their money,” Galindo said.

(Editing by Peter Henderson and Paul Thomasch)

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