The 20% “Tariff”

The President is floating an idea of a 20% tariff on Mexican goods. It’s one idea of many, according to Press Secretary Sean Spicer. This is one of the few topics that a vast majority of economists can agree on: this is a bad idea. A tariff is a tax imposed on goods and services. The idea being floated is an ad-valorem tariff, which is placed based on the value of the product (for example, a 20% tariff).

Keep an eye on the IGM Forum website as I’m sure they will address the issue of tariffs. The IGM Forum is a place for economists to give their opinion on economic policies, where they can weigh their confidence in their answer. Of course, that’s if you trust economists. Look at Table 1 if you want to see how the Economics Expert Panel (EEP) differs from a quarterly representative sample of the US population (FTI).

Back to the issue of taxes tariffs. This is an attempt to get Mexico to pay for the wall. The linked website has a really cool calculator. It also goes into why the estimated cost of the wall is a lot higher than what we’re being promised. But at least 20% of the $295B we spend on importing Mexican goods comes out to $59B. Maybe Trump knows that the cost of the wall is higher than what he’s telling the American people.

Except here’s the rub: A tariff on imports means that when American consumers buy the products, the United States government tacks on 20% to the cost of the good. So when the President says that he’s making Mexico pay for the wall, what’s more likely is that American consumers will be paying more for Mexican goods (and maybe there will be a public relations campaign to blame Mexican businesses for the increase). So the government earns 20% on every good imported from Mexico.

Of course, one country cannot levy tariffs against another country if both countries participate in the World Trade Organization. More specifically, NAFTA countries cannot levy such broad tariffs on each other as part of, well, NAFTA. So for Donald Trump to attempt to levy tariffs against Mexico and “to eventually extend the 20% import tax to all countries” the United States must first leave both NAFTA and the WTO. This cannot be done by stroke of pen but rather Congress must vote to end the laws that integrate NAFTA into our economy.

So why is a tariff such a bad idea? Well, lets list the things that the United States imports the most from Mexico:

  • Electrical and mechanical machinery
  • Medical and optical instrumentation
  • Vehicles
  • Oil
  • Delivery trucks
  • Computers
  • Telephones
  • Beer
  • Agricultural products (mostly avocados, tomatoes, berries)

Sources: 1, 2, 3

CNN says that companies like Ford, General Motors, Walmart, and Best Buy will be hit.

Imagine paying 20% more for a vehicle, for your favorite Mexican beer, for computers, for avocados.

If you think medical bills are high, medical equipment costs are rising at a faster rate than overall medical costs. Add 20% to 4% of your medical bill. The average person spent $9,990 on medical costs in 2015. The medical goods part comes out to $399.60. It could become $479.52 for those whose doctors use medical goods from Mexico. On a broader scale, the United States population paid $3.2T for medical costs in 2015. That’s $128,000,000,000 for medical goods. After this tariff, we’re looking at $153,600,000,000 for medical goods. Suppliers already “charge more for things like durable medical equipment.” That will only get worse.

We are also Mexico’s largest export customer. The difference is $291B to Canada at $24.5B. China is next at $7.89B. Most likely, Mexico would shift from United States to Canada and China. Mexico also directly invested $17.7B in 2014 with the largest amount going towards manufacturing. So those manufacturing jobs that we keep hearing about will lose some of their funding. Ruh Roh. One of our closest trading allies (other than that telegram) will likely increase trade with a nation that most Americans have serious problems with.

Americans See a Variety of Problems in Relationship with China

All of the above is being discussed under the assumption that Mexico would not retaliate. Considering that the Mexican President canceled plans to meet with Trump because of this same wall, I think the above assumption is false. And this, ladies and gentlemen, is how you get a trade war. Now, to be fair, protectionist policies don’t necessarily cause recessions. Instead, they simply cut exports and imports while reducing efficiency and therefore the potential output of the economy. And who needs efficiency, right?

Back to potential retaliation. At risk are six million jobs which rely on Mexican trade.

We are risking six million jobs and at the table fighting for those jobs will be the Department of Commerce Secretary Wilbur Ross, the same man who has sent 2,700 jobs overseas. But it’s okay, the Carrier deal kept 800 jobs in the United States, jobs that will become automated anyway.

That’s jobs. What if Mexico enacts a retaliatory tariff? In 1996, they did this. The United States created a tariff on Mexican-made brooms and Mexico responded with a tariff on American whiskey and wine. So we know they’re willing to commit to a tit-for-tat strategy. This is a nice segue into game theory, but I’ll leave you with this simple link and this complicated link. Long story short: tit-for-tat is not good.

When Obama enacted a tariff on Chinese tires in 2009, it “cost jobs and raised prices” just like economists are saying a tariff against Mexico will. When the Chinese tire tariff was implemented, United States tire producers also raised prices. Only 3.26%, but you can see why businesses might like tariffs. So now the government and businesses are making more money. That means consumers are the ones paying. The total cost to American consumers for each of the 1,200 jobs saved by this tariff comes out to $900,000 per job. Except this translated to a loss of about 3,731 jobs in the retail sector because American consumers had less money to spend. So in the end more jobs were lost than saved.

If we enter a trade war with Mexico, neither consumer population will win. It’s a lose-lose situation. From 2009 to 2014, when data was last available, more Mexicans were leaving the United States than were coming here to stay. We actually were seeing a net negative immigration rate from Mexico to the United States.

Net Migration to the U.S. From Mexico Below Zero After the Great Recession

More immigrants are coming from Asia, actually:

immigration1

Unless, of course, you manage to rock the Mexican economy. A trade war would lead to less job prospects for Mexican workers. Can you guess where they’ll go when they lose hope for a job?

Lets address something: I’m mostly talk about what-ifs here. I did mention 2009 but that’s still pretty recent. The following is a 1986 study published by the Institute of International Economics pulls from government data. They looked at 31 case studies and examined the causes of protectionist policies.

protectionism

Producer Gains – Consumer Losses > 0 is good. This did not happen. Not one time was there a benefit. This entire article has a lot of good information but this is my favorite line:

“Spending $500,000 to $600,000 per year to save a $50,000 to $60,000 per year factory job might make sense politically, but only if the true cost of saving those jobs is hidden,” Perry said.

Protectionism in today’s increasingly global economy is not a good idea.

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