President Trump’s administration suggested the idea of a 20% tax on imports from Mexico to cover the potential costs of the proposed border wall with Mexico. The administration made clear that this was only on possible way to recoup costs, but it is one they are at least considering. Is this a good idea?
Probably not, but the first question is of whether he can do this unilaterally. We have discussed this in the recent past, and the basic answer is that he may lack the authority to levy a tariff or tax, but if he does so anyway then legal action would be required to overturn his decision, which could take over a year, far too late to avoid any economic damage.
What might be the impact? Well, that depends on what we’re importing, and who bears the brunt of the cost up front. The LA Times reported back in August about the positive impacts of Mexican manufacturing with respect to American jobs, and this is based in large part on Mexico’s need to import goods and materials in order to make its goods, which are often parts for finished products that will be completed in the US. In essence, Mexico is part of the US manufacturing chain. This means that putting a 20% tax on imports from Mexico is going to drive up costs throughout the manufacturing chain, which will negatively impact workers and consumers in the US.
So our government wouldn’t pay for the wall; we would.
Despite the trade deficit cited by Trump, there is ample evidence that our current trade arrangements have been economically beneficial to both the US and Mexico. (Keeping in mind that a strong economy does not guarantee economic equity…) The trade deficit ignores the overall improvement in exports over the last two decades, and focuses primarily on import/export of goods. The US has a services trade surplus of about $9 billion (which obviously does not erase the $60 billion trade deficit in goods but is still worth mentioning).
It seems that the focus on trade deficits is really just another attempt at scapegoating. The real issue in the US is not the disappearance of manufacturing jobs – which are on the decline across the globe primarily due to automation – but is instead the lack of innovation, insufficient investment in education, and wage stagnation precipitated by a lack of incentive for businesses to reinvest profits in human capitol (workers).
That isn’t solved by making Mexican imports more expensive.