Sunday, January 29, 2017

Who Will Pay That 20 Percent Tariff?

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.


  1. An extreme example of the effects of tariffs exists here in the Bahamas. Duties of up to 45%!!! are imposed on almost all imports. On top of this there's a 7.5% VAT tax, but that's another story.
    Anyhow, since items are priced at about 45% MORE than stateside, the locals are paying through the nose for their purchases. Most of the tax money goes to the oligarchs in Nassau, but that's yet ANOTHER story.
    So I'm headed over to Fla this week with the boat for some shopping. I hate to deprive my friends here of my custom, but I gotta eat. So the poor Bahamians suffer in at least two ways from this outrageous tariff. They pay more, and they get less business. Not good.

  2. Would a 20% import tariff be imposed on the retail sale value of a product or on the wholesale value of the product at the point of import?

  3. If Mexican products don't sell, then American consumers fund the wall since we just pre-paid for it with tax dollars.

    If Mexican products do sell, then American consumers fund the wall since we bought the products that contain the increased tax (on the whole not talking a single product like beer).

  4. And the dumbest part is that these producers employ lots of Mexicans making the entire continent wealthier. As these businesses in Mexico lay off workers then guess what? That is more competition for lower paying jobs in Mexico and guess what? That is more of the lowest skilled coming to the USA to work in the black or grey markets. Isn't that what the tariff and wall are supposed to prevent. And even with the stupid wall, the Mexicans can dig tunnels, drive boats around, or how about pay off corrupt board guards and come across legally in addition to taking planes, trains, automobiles, busses, etc.

  5. You have risen further in my esteem Bionic. A fellow Dos Equis aficionado! While I am not a beer connoisseur, I love it and the dark lager Negra Modelo.

    It will end up biting Mexico and the USA in the end. Things will worsen if there is a retaliatory tariff from Mexico. People seem to forget that there are businesses heavily invested in providing valuable products and services to Mexican consumers. Not to mention China has been very active in Latin America and the Caribbean. It will not be hard for Mexico to look elsewhere for trade partners.

    While the USA is bullying people at the point of a gun, China is offering the carrot of trade and commerce. As an outsider, the USA seems to be helping China further its global influence with its belligerent stances. And there is no middle ground. You must either be a vassal or an enemy.

    Who knows. Maybe this tariff situation will have the effect of making the whole NAFTA thing fall in on itself.

    As for this ridiculous wall idea: Ron Paul once said that walls can be used to keep people in as well as to keep them out.