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Trump’s 20% Border Tax: Unintended Consequences

Yesterday, Trump administration floated idea of collecting 20% border tax on goods, exported from Mexico to the United States in order to pay for the wall. The statement started uproar in media and social networks, eventually causing the administration to step back and announce that the border tax is just one of many ideas that are being discussed.

Mexico is one of the most important trading partners of the United States, with total volume of trade over $550 billion and approximately half of it ($300 billion) due to imports from Mexico. The imports include not only the goods produced by Mexican companies, but also the goods produced by the US companies in Mexico and imported into the US.

How would the 20% border tax affect the trade relationships? The first thing to consider, that approximately half of the trading volume is going in the other direction. If the U.S. charges 20% tax on imports from Mexico, it is reasonable to expect that equivalent 20% tax will be charged on all US exports to Mexico. As a result of cooperation within NAFTA, the economies of the United States, Mexico and Canada became intertwined. The manufacturing companies may have plants located in all three countries, and parts and components are repeatedly cross the border during the manufacturing process. Washington Post reports:

Imports of goods and services totaled $316 billion, but exports totaled $267 billion in 2015. Mexico became the second largest market for exports of U.S. goods …

According to the U.S. Chamber of Commerce, 6 million U.S. jobs depend on U.S. trade with Mexico. And the Wilson Center has estimated that 40 cents of every dollar’s worth of goods imported from Mexico is actually made in the United States.

Nearly half of those exports are machinery, electrical machinery and vehicles. And many of them travel circuitous routes from one country to another, journeys that would be difficult to pull apart.

The automobile industry is among those that have developed supply chains that cross national boundaries since the adoption of the North American Free Trade Agreement …

Economists say that Trump’s plan might push down the value of Mexico’s currency, the peso. That would make Mexican-made goods cheaper, offsetting the tariff, the administration has said. But Hanson notes that a strong dollar would make U.S. goods more expensive and would make it harder than ever to export them. “By impoverishing Mexico we partially undo those changes in trade,” Hanson said. (Read the full article)

Even that the 20% border tax is adopted, the US consumer are going to be paying it. The importing companies (such as Walmart and Target) will have to raise prices. The competing US companies are likely to raise prices on their products as well.

The question is also raised whether we need the wall at all. The good article reviewing the trade relationships came out in The Hill, that states:Now, what about that wall? Its cost sounds large, but we should remember that $15 billion is just 0.1 percent of U.S. GDP.

The problem is not the cost; it’s the opportunity cost. Think of what could be done with $15 billion. Put that toward improving higher education, infrastructure, medical research, or renewable energy. Any of these alternatives would bring our country far greater benefits.

Economists argue about the exact impact of immigration on the wages of U.S. workers. Some argue that increased immigration has lowered the wages of unskilled U.S. workers; others find no effect.

Both sides actually agree that increased immigration does not affect the wages of the vast majority of U.S. workers, does not create significant unemployment, and, generally, has fairly minor impacts on the U.S. labor markets.

In a nutshell, most illegal immigrants work at jobs that U.S. citizens just do not want. (Read the full article)

The administration had to step back and declare that the border tax is only one of the propositions that are being discussed.

White House spokesman Sean Spicer said Thursday that the president is considering charging a 20% tax on all Mexican imports as a way to make Mexico pay for the wall — a demand that prompted Trump and Mexico’s president to scrap a planned meeting next week.

The idea triggered a cascade of criticism and jokes on social media about Americans facing price spikes on avocados and tequila. Soon after, Spicer said the tax was just one proposal to finance the wall. “The point is, American taxpayers are not going to fund it,” he said. (Read the full article)


See also:

Trump is Considering 20% Border Tax to Pay for the Wall Project

Trump Border Tax and the Dollar Appreciation

Trump wants to ding imports from Mexico. What happens to stuff we send the other way?

With import tax, we pay for the wall, not Mexico

Trump spokesman walks back on import tax idea amid uproar, jokes