Denver, CO,
31
January
2017

Trump’s Proposed Tariff on Mexican Exports Will Backfire

Summary

George DeMartino is a professor of international economics at the Josef Korbel School of International Studies. He has taught at the University of Denver since 1993. DeMartino's research interests include global political economy, industrial relations, the ethical foundations of economic theory and policy, and political economy theory

The new Trump initiative to get Mexico to pay for the proposed wall along the Mexican border through a 20% tax on Mexican exports to the U.S. violates a range of international trade laws, and is apt to generate retaliation that could hurt important sectors of the U.S. economy. But it is also likely to backfire in five other ways:

1. The incidence of the tax will fall heavily on American consumers, American firms in Mexico that export to the U.S., and American firms at home that import from Mexico—like retailers and firms that import inputs from Mexico for final production in the U.S. For Mexican exports for which there are ready substitutes, U.S. firms will bear a greater share of the tax in the form of reduced profits, but they will try to offset those losses by reducing their U.S. workforce. For goods without ready substitutes, U.S. consumers will be on the hook for a greater share of the tax. Either way, despite appearances to the contrary, Americans will pay a substantial share of the costs for the wall. Only Trump’s Orwellian logic can conclude otherwise.

2. Where there are available substitutes in the form of exports from other countries, Mexican exports to the U.S. will decline. The decline would of course reduce the expected revenues from the tax, and trigger other unintended effects (see #5, below).

3. President Trump will say that the tax will induce U.S. companies to relocate production and jobs back from Mexico to the U.S., but most will not do so. If corporations think the tax is likely to persist, they are more likely to move production to other low-waged countries than back to the U.S.

4. In fact, if the tax persists for even a year or two, it is much more likely to accelerate a trend already under way—the substitution of Chinese for Mexican goods in U.S. markets. China has posed a serious threat to Mexican exports of high-skilled and medium-skilled manufactured products for at least a decade. The Trump tax will only accelerate the trend. And so Chinese leaders are apt to be even more excited about the tax (and, by the way, the Trump wall) than are nationalists in the U.S. It’s not at all far-fetched to argue that the primary beneficiary of the tax on Mexican exports to the U.S. will be China, followed by a small number of other low-waged countries that will rush to exploit the opportunity created by increased Mexican prices in the U.S. market.

5. The social impact in Mexico could be severe, hurting the most vulnerable communities rather than administration of Mexican President Pena Nieto, whose popularity is certain to rise as a consequence of his standing up to Trump. To the degree that the Trump tax reduces Mexican exports, it can be expected to increase the number of Mexican workers trying to enter the U.S.—legally and illegally—and push some displaced workers into illicit market activity. And so the Trump tax will undermine the very purpose for which it is intended—to reduce illegal border crossings.

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