Texas has a long and complicated history with tariffs. Over its decade of existence, ending in 1846, the Republic of Texas generated more than half its income—almost $1.3 million—from import taxes. Efforts by the young nation’s lawmakers to enact new tariffs were often thwarted by presidential vetoes from the likes of Sam Houston and Anson Jones.
Most of today’s state officials have so far stayed silent about the new border taxes that their fellow Republican, President-elect Donald Trump, has vowed to impose on foreign nations, including Texas’s biggest trading partner, Mexico. Most economists warn that the proposed tariffs, combined with another of his major campaign promises—the mass deportation of undocumented immigrants—could hit Texas harder than most other states. These policies may kneecap two key legs of the state’s robust economy: low taxes and cheap, abundant labor.
“When you hear [Governor Greg] Abbott talk about Texas being willing to help Trump deport all these migrants, you’re going to have a serious shortage of workers, and prices will certainly go up,” said Tony Payan, director of the Center for the U.S. and Mexico at Rice University’s Baker Institute. “Then the Texas formula is compromised.”
Trump has called for 25 percent duties on goods imported through Mexico and Canada, levies as high as 60 percent on goods from China, and 20 percent from everywhere else. Economists have warned that tariffs could lead to higher prices for consumers on everything from avocados to automobiles, an outcome Trump recently acknowledged. Leaders of the target countries have vowed that they would meet higher U.S. tariffs with levies of their own against U.S. exports. The result could be an all-out trade war, and Texas, as the largest exporting state in the country with almost $445 billion in goods shipped last year, could bear the brunt.
“Texas is a significant exporter to Mexico, and if Mexico decides to set a duty on U.S. exports, it could have significant impact on Texas’s economy,” said Pat Jankowski, chief economist for the Greater Houston Partnership. “If we put a twenty percent tariff across the board on anything that we import, other nations are going to do the same. And when you start doing that, it’s going to juice up inflation again.”
Texas and Mexico did more than $272 billion in trade last year. Payan estimates about half of that is what’s known as intrafirm trade, or goods shipped among divisions of the same company in different locations. For example, an electronic component of a vehicle may be manufactured in Texas, shipped to Mexico to be added into, say, a control board, and then shipped back to Texas for assembly into the finished product. Untangling those interconnections won’t be easy. “It’s very well integrated,” Payan said. “De-linking the Texas economy from the Mexican economy would hurt everyone.”
Tariffs would drive up material costs for construction companies that import lumber, chemical companies that import additives, and for oil producers in the Permian Basin in need of steel and drilling equipment. A quarter of American steel and about three-fifths of aluminum are imported from Canada. Mexico is also a major steel supplier. Trump’s tariffs could also boost the prices that American steelmakers charge to customers such as automakers or drilling equipment suppliers by 15 to 20 percent, Citigroup predicts. “They’re going to charge whatever the market will bear,” Jankowski said. “So both imported goods and domestic goods will go up.”
Those higher costs come at a time when oil prices are under pressure from abundant global supply and slowing growth in demand, especially from China. Producers could find themselves squeezed between paying more for drilling equipment and getting less for every barrel of oil they sell. Texas refineries would likewise see their costs increase, which in turn would affect what Texans pay at the gas pump.
Texas is a major exporter of petroleum and related products, but crude oil is also one of the state’s biggest imports, to the tune of almost $78 billion this year, up more than 30 percent from 2023, according to WiserTrade, which tracks trade data. Most U.S. refineries are calibrated for processing cheaper heavy crude, much of which comes from Canada and Mexico. Very little of the higher-quality crude produced in Texas is refined here because it’s more economically advantageous to ship it overseas. The system works fine—as long as petroleum can flow easily between countries without costly tariffs.
Mexico imports more than 70 percent of its natural gas from Texas, which it uses to power factories that make goods for export to the U.S. If demand for such goods slows, so will demand for the fuel to make them. Other Texas companies that could take a hit from higher tariffs include transportation and warehousing companies that depend on the flow of goods across the border.
One perhaps surprising product that could get more expensive is books. I own a small publishing company that would be directly affected by higher tariffs. In 2019 import levies on products from China drove up the cost of books shipped from Hong Kong, where many are printed. This time, the impact could be far greater. One of the printers my company uses, for example, is based in Canada, and even U.S. printers rely on paper imported from Canada. Small publishers have little margin to absorb higher printing costs. That comes as the number of Texas publishers and independent bookstores continues to grow.
Even if Texas companies tried to shift orders for necessary materials to domestic vendors, those vendors may not have the capacity to meet the demand for everything that’s now imported. It could take years for U.S. suppliers to increase capacity or build new factories, and they are only likely to make those investments if they believe the tariffs will be long-lasting.
Trump’s planned mass deportations could further compound these challenges. Immigration—both legal and illegal—helps Texas replenish its workforce, which keeps its economy growing. The demand for undocumented labor has grown largely because the federal laws governing legal immigration haven’t been updated since 1986. Without enough legal workers to fill jobs, many companies, knowingly or unknowingly, rely on the undocumented.
Suddenly removing millions of immigrants from the workforce could disrupt industries ranging from construction to farming to meatpacking. It could trigger an economic downturn that would fall hardest on states, such as Texas, that have a greater dependency on immigrant labor. “Subtracting hundreds of thousands, possibly millions, of workers from the workforce would also depress consumption, and you may create a recession,” Payan said.
A recent study by the American Immigration Council found that mass deportations would reduce the U.S. gross domestic product by as much as 6.8 percent and cost the federal and state governments tens of billions in lost tax revenue.
Trump has been vague about how he would implement his deportations. Payan thinks it’s unlikely Trump will deport more migrants than the three million deported under Barack Obama—the highest for any U.S. president. Trump likes to use the threat of tariffs to initiate trade negotiations. If he gets at least some of what he wants from our foreign trading partners, he may not need to follow through. At the very least, he’s already got the attention of Mexico President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau, both of whom have spoken with Trump since he announced his planned 25 percent tariffs.
The recent phenomenon of nearshoring—corporate speak for moving factories closer to their destination—could mitigate the impact of tariffs. In Texas’s case, nearshoring means more plants in places like Querétaro, 140 miles northwest of Mexico City, rather than China. Austin-based Tesla, for example, is planning a new gigafactory in Mexico and has been encouraging its Chinese suppliers to set up plants there. Goods imported from Querétaro may cost 20 percent more under Trump’s tariffs, but that’s better for American consumers than the 60 percent increase they’d face if the products were coming from China.
There’s also the possibility that some companies or industries could receive special favors under a second Trump administration. When he enacted tariffs in 2019, Trump granted exceptions to companies such as Apple, which manufactures many of its iPhones and other products in China. Given his “drill, baby, drill” energy policy, he might exempt the entire oil and gas industry. Or he could cut his new supporter Elon Musk a break and waive tariffs for Tesla but not for other electric-vehicle makers.
While the short-term impact of Trump’s policies could shut down many building sites, disrupt crop harvests, and trigger price increases and slower economic growth, such impacts might be offset somewhat in the longer term. If the tariffs are as high as he has threatened and they stay in place indefinitely, more companies may shift manufacturing to the U.S., and states like Texas—with low corporate taxes, abundant land, and a governor who’s eager to shower tax exemptions and other financial incentives at new arrivals—could attract even more business and employ more Texans.
“There could be a scenario to where we see a significant amount of foreign direct investment because companies need to be here,” Jankowski said. “The U.S. is not only the largest market, it’s the healthiest market, so it could force companies to make investments in the U.S. that they would not have made otherwise.”
But perhaps the most concerning aspect of Trump’s threats is that no one knows what exactly he might do. Business hates uncertainty. Leaders like to know they can trust rules and policies so that they can make investments that typically won’t pay off for years. But, given Trump’s mercurial decision-making style, the only certainty about economic policy for the next four years is that it’s going to be uncertain. That could foster an uncomfortable business climate for Texas companies, a higher cost of living for Texas consumers, and a sputtering end to the “Texas Miracle.”
