Possibly the most memorable of President Donald Trump’s campaign promises was the wall on the border of the United States and Mexico. “We need to build a wall,” said then Presidential candidate Trump, “and it has to be built quickly.” And when pressed on who and by what means the wall would be built and payed for, President Trump has promised that America will build the wall, and “Mexico will pay for [it].”
Now, no matter how one feels toward the “the Great Wall of Trump” and the geopolitical implications thereof, we can rest assured that if the Trump administration goes forward with the outlined means of paying for the wall, the cost will not fall to Mexico but to us.
After the President signed the “BORDER SECURITY AND IMMIGRATION ENFORCEMENT IMPROVEMENTS,” executive order – which administers “the immediate construction of a physical wall on the southern [United States] border” – White House Press Secretary Sean Spicer suggested that in order to pay for the wall, the United States would impose a 20% tariff on Mexican imports. “When you look at the plan that’s taking shape now,” said Spicer, “using comprehensive tax reform as a means to tax imports from countries that we have a trade deficit from, like Mexico.” The theory is that by imposing a tariff on Mexican imports, 1) the Federal Government will raise the funds necessary for the construction of the wall at Mexico’s expense, and 2) we would see a decrease in imports to balance with the exports to Mexico, thus all but eliminating the trade deficit.
The only problem with this theory is that it simply does not work the way they have suggested.
A trade deficit is not, that in itself, a bad thing. It occurs as a negative balance of trade when a particular nation’s imports exceed that of its exports. To simplify, when you go to the supermarket to buy groceries, you are experiencing a trade deficit with the market. That is, you have a little of what the supermarket wants (money), and the supermarket has a lot of what you want (groceries). Thus, the market will have to keep some prices lower and some prices higher to pay the natural price or “cost” of the product (how much money it takes to grow it, clean it, package it, ship it, advertise it, etc.) and still make a profit.
The benefit of this deficit rests in the fact that because there is a surplus of goods that the market wants to sell, and the consumer will typically search out the product that is best priced, with the best quality and in the best place. The market must ensure that the consumer gets what she wants, or the market will not get what it wants. Thus, if a Mexican manufacturer wants American consumers to buy his products (e.g. FEMSA, Grupo Mexico, Grupo Modelo, Grupo Bimbo, etc.) he must ensure that his costs are low enough, the standard of his product is high enough, and the location at which his product can be bought is convenient enough to make a profit.
So what happens when a tariff is introduced into the equation? A tariff is a tax placed on imports, the same as the sales tax one pays at the supermarket. So, when Mexico exports its goods into the U.S., the Federal Government will lay (if Sean Spicer was correct) a 20% tax on the imported goods and products. That means that if a Mexican manufacturer intends to export his goods to American consumers, he will have to raise the price of that good to balance with the cost of bringing it to market.
For instance, let’s say the government decided to lay a special tax on apples because there was a surplus of apple farms in a very fruitful year, and it wanted to use that extra tax to subsidies the dairy farms that had a very unfruitful year. Because the apple farmer already had to grow the apples, pick the apples, package the apples, ship the apples and advertise the apples, and then the government added a special tax that she had to pay on bringing her apples to market, and because she must still make a profit to compensate for all the labor of providing the apples, the cost of apples goes up higher than it naturally would have been.
But, it is not the apple farmer who will pay that extra tax, but the consumer.
Likewise, if the government wants to use that 20% tariff to pay for the expenses of building a wall, the consumer will see a 20% increase in the cost of Mexican goods. Thus, the payment of the wall will transfer to us, the American consumers.
And the great evil of imposing such a high tariff on a nation with a trade deficit is that, typically, instead of withholding goods from the U.S. (being that the one nation has such a vast surplus of goods, the cost to withhold them is far greater than the cost to export them) the Mexican manufacturer will be obliged to continue to export his goods at the best price, in the best quality and to the best place to keep his business afloat. And, assuming that consumers feel that the 20% increase is reasonable enough to pay (and if not, the manufacturer will see a vast dip in labor, production and wealth), Americans will continue to pay, indirectly for the wall.
I am not here to take sides on whether or not the wall should be built, as both positions have great merit to their arguments; rather to propose that a tariff on Mexican imports translates into Mexico paying for the wall is simply incorrect. If or when the wall is built, should the Trump administration continue with the plan currently proposed, America will both build and pay for the wall alongside a 20% increase in the cost of Mexican products.