Thursday, January 26, 2017

"You'll pay for this!"

So Trump found a way to make Mexico pay for The Wall: slap a 20% tariff on imports from Mexico.
"I think the president is using every tool available to him to make sure that, as we put this wall up, he honors his commitment he made to the American people that it's going to be paid for and that Mexico will pay for it," Rep. Tom Reed (R-N.Y.), a close Trump ally and member of the tax-writing Ways and Means Committee, told The Hill at the GOP retreat in Philadelphia.
OK, about that, ...

This is something covered in probably every introductory microeconomics class: Who pays the tax?

Take the example of a cucumber grown in Mexico, with the producer getting paid $0.50. Then it gets shipped to New York and put on sale in a grocery store, and by the time you see it in the produce section, its cost to you is $0.80.

The 20% tax presumably gets applied to the $0.50 paid to the producer in Mexico, so the tax is $0.10.

One extreme outcome is if the producers drop their price to $0.417, so the 20% tax is $0.083, and the price at the border is still $0.50, and the price in the store for you is still $0.80. That's the "Mexico pays for it" outcome.

The other extreme outcome is that the producer continues to receive $0.50, so the tax is $0.10, which gets passed along to the consumer, and the price in the store ends up being $0.90. That's the "You American consumers are paying for it, suckers!" outcome.

Neither of those is likely. The actual outcome is almost certain to be somewhere in between. Exactly where in between depends on the good, and the alternative places Mexican producers can sell, and the alternative places American retailers can buy, and the willingness of each side to accept less or pay more.1

And so the price in the store rises, but only to something like $0.85. Mexican producers drop their prices perhaps to $0.47, so there's an $0.094 tax and the price at the border is $0.564, and the American trucking companies and grocery stores eat part of the loss.

The winners here are non-Mexican producers of cucumbers. Before they had to compete with Mexican cucumbers that cost $0.80 in the store; now they just have to worry about cucumbers that cost $0.85. If those non-Mexican cucumber producers are in the U.S., then that's very much in line with Trump's "America First" message from the inaugural screed. If they're in other countries, then it's a way for U.S. policy to hurt Americans (and Mexicans) while helping non-Mexican foreigners.

Thanks, Trump.

Who else is affected? Will Mexican-made components of American cars be taxed? Will that cost be passed on to U.S. consumers? Will U.S. car companies eat the loss? They could in principle find non-Mexican suppliers, but that presumably is a more expensive option than what they're doing now, or they would already be doing it. So again, to some extent Americans pay.

And the more successful American companies are at finding non-Mexican sources for their cucumbers, t-shirts, car parts, etc., the smaller the quantity of imports there is from Mexico for us to tax, and so the less revenue is raised. It hurts Mexico (which probably pleases trump and some of his supporters), but it doesn't yield tax revenue.

And if U.S. companies are less successful at finding non-Mexican suppliers, that means they're going to have a harder time forcing Mexican producers to accept lower prices, and so the cost of the tax will be borne by some combination of reduced profits for U.S. companies and higher prices for U.S. consumers.

But maybe it's just a bargaining chip: Look, Mexico, this 20% tariff is going to crush you, but you can avoid it by just up and paying for the wall like I said you would.

It's hard to imagine a Mexican government that could accept that proposition and survive an election, if it made it even that far.

Is that really what the Republicans are thinking? "Sure, if we actually imposed the tariff, that would amount to people in the U.S. paying for that wall that Trump said the Mexicans would pay for. But that won't happen, because we'll use the threat of tariffs to strike a deal with them - a nation whose identity is tied up with resistance to and resentment of the U.S. It'll work great."

Geniuses, every last one of them.

But then again, it was hard to imagine Trump being where he is today, so who knows what's actually possible.

1. The technical term is the price elasticity of supply or demand.

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