Memo To Trump - 20% Mexican Import Tariff Means Americans Pay For The Wall

Tim Worstall ,  

(AP Photo/Andrew Harnik, File)

The one thing which truly worries about the Donald Trump administration is that so many of the people within it seem not to understand how trade works. No, this isn't about marginal decisions, or disagreements upon what is desirable. Nor is this something which is subject to argument--imposing a 20% import tariff upon Mexican goods would mean that it is Americans who would be paying for the wall.
Please do note that this is nothing, here at least, to do with whether a wall is desirable, or not so, nor even whether trade protection is a good idea and all that. This is just a very, very, simple economic point and one that is simply true. The people who pay tariffs are the people who buy the goods which tariffs are imposed upon. Putting a tariff upon goods moving from Mexico to the United States means that it is the people in the U.S., who are paying the tariff.



There is indeed a secondary effect, which is that less will be sold and that this will impact profits and wages in Mexico. Not that I think that's a good idea either of course. But that still leaves it to be true that any money actually raised by a tariff will be paid by Americans, not Mexicans.
Thus this idea is simply ludicrous:

Relations between the U.S. and Mexico appeared to be heading for crisis on Thursday after Enrique Peña Nieto cancelled a meeting with Donald Trump and the White House retaliated by suggesting a new 20% tax on imports from its southern neighbor to finance the construction of a border wall.

Whatever might be true somewhere else this universe just doesn't work this way.

Mr. Trump has appeared to embrace a proposal by some Republicans to impose a 20 per cent tax on all imported goods to pay for a wall stretching the entire 1,933-mile frontier.
Sean Spicer, the White House press secretary, told reporters that the proceeds would be used to pay for the border wall, which is estimated to cost as much as $20 billion.

You most certainly could impoverish people on both sides of the border by doing this but it would be Americans coughing up the money if you did. As one person has got right:

It Harms American Consumers. You think Mexico’s paying for the wall? Wrong. American consumers are through an indirect tax. You will now have to pay more for all the products imported from Mexico, or for their nearest American competitors.

It's important to understand both parts of that.
So, at the moment, Mexican widgets (the all purpose word economists use to mean "something but we don't want to confuse people by saying steel, or cars, or oil" - although it also has a technical meaning of a prize or a toy in a packet of potato chips or crisps) cost $100. We add 20% in import duty and now they cost $120. OK, so, now American consumers must pay $120 for their widgets. See, it's the Americans paying the import tariff.
Sure, sales of Mexican widgets in the U.S. will fall and this will hurt profits and incomes in Mexico. But of course no money is raised in import tariffs from the reduction in imports, is it? The cash that is paid in tariffs, whatever that amount is going to be (hey, it might even be zero, the price rise being enough to entirely stop imports), is going to be paid by American consumers.
But that's not the only effect. The thing that stops American producers from raising their prices and their profits is the competition from all the other people selling the same or similar things. So, we now knock some to all of that Mexican competition out of the market. Prices thus rise for American consumers. And get this, we don't even raise any money in tariffs because Americans are just paying more even though goods aren't crossing the border and aren't paying tariffs. Thus Americans get to pay more, Americans become poorer, and we don't even get the money to pay for the wall.
No, this is a very silly idea and it's one that comes from people just not having the first clue about trade. Tariffs on Mexican imports will be paid by Americans--such duties would therefore mean Americans paying for the wall which isn't the point at all, is it?