Trump has floated the idea of a 20 percent tariff on goods imported from Mexico in order to pay for the wall. This is Trump’s way of fulfilling a campaign statement (one dare not call them promises, given the track record of virtually every elected official on earth): Trump will build a wall and Mexico will pay for it.
One bad idea begets another. The wall is the first bad idea: there have been numerous “walls” built along the southern border of the United States; none have apparently been successful towards the intended purpose. Why try another? There are other ways to patrol a frontier; better yet, place all property in private hands and let’s be done with this issue.
The tariff is a second bad idea. Why punish Americans via an added sales tax?
But just how, precisely, will Americans be punished? And will the tariff be borne only by American consumers? I suggest not. I will use an example of an import of which I know something about: beer.
Dos Equis – a fine Mexican beer. Let’s call the price today $6 for a six pack. Will I now have to pay $7.20? Only if one believes the producer is in charge of the price. But of course, in a market it is the consumer that is in charge.
Most beer drinkers can enjoy multiple varieties of beer. In place of Dos Equis, it is easy enough to buy a nice Belgian import – say Leffe – a beer not subject to this new tariff. Is this American who buys Leffe instead of Do Equis subject to the tariff? Certainly, he may not be able to enjoy his preferred choice of beer, but he still has many fine beers to choose from; Mexico isn’t the only beer-producing country in the world.
What happens next? Will all non-Mexican producers of beer raise prices by 20% to take advantage of this gift from Trump? I suppose it is possible, but given the level of competition in the beer market, not likely. Of course, for the handful of beer connoisseurs who model themselves after “the most interesting man in the world,” nothing but Dos Equis will do. For these consumers, the 20% increase will come out of their wallet….or will it?
What is more likely is that sales of Dos Equis will fall due to this tariff. The burden will end up on the shoulders of the producer in Mexico. Will the producer cut price to maintain volume or will he maintain price and see a reduced volume? This is the producer’s choice and in either choice the producer will pay.
In other words, Trump is more right than a simple analysis suggests.
I know my example is a simple one – there are much more complicated situations – the electronics and automotive industries have complicated supply chains between and amongst Mexico, the United States, Canada, Europe and Asia, for example. Exactly how these play out, under any scheme floated by Trump, is anyone’s guess. But I stick to a subject I know – beer!
Am I suggesting that I support the tariff because the other guy will pay? Never. Reduced trade is always a bad idea; any government action that restricts trade is a bad idea (in other words, every government action is a bad idea because every government action restricts trade). It lowers the standard of living for everyone – not only the two involved in the trade, but for everyone else (except for the thief and his friends). Money stolen for one purpose is money not spent on the value-driven choice by the owner on a different purpose.
But my main point regards who will pay. And economics teaches us that the answer is not so simple; there are always secondary effects to be considered.