Donald Trump might want to impose a 20% tariff on Mexican imports as the best way to force Mexico to pay for a border wall.
According to White House spokesman Sean Spicer, a tax on Mexican imports will “easily pay for the wall.”
Spicer later seemed to walk back on the comments, saying it was just one of the many ideas the administration is considering for funding the wall.
It sounds so easy and simple. Build a physical wall and pay for it with a tariff wall.
But there is nothing easy about such a tax increase; what Trump conveniently ignores is that any tax on Mexican imports would be passed on to US consumers, manufacturers and exporters. One way or another, we will pay for that wall.
According to the Office of the US Trade Representative, Mexico is the third-largest US goods trading partner, with more than $296 billion in imports in 2015.
Based on current trade flows, a 20% tariff would effectively impose a $59.2 billion tax on US consumers who purchase Mexican imports. That means that billions of dollars’ worth of Mexican fruits, vegetables, beer, minerals, equipment and cars would all be 20% more expensive to US consumers.
Mexico also is one of our most important supply chain partners, so the tax also means that US industry would pay billions more in taxes on Mexican products used for manufacturing at home. And Mexico is our second-largest export market, with hundreds of billions of dollars in goods exported from the United States to Mexico every year. Any tax on Mexican imports risks retaliatory taxes on US exports.
Why? Because the proposed tax on Mexican products unequivocally violates our treaty commitments and there is a real and tangible cost for such violations.
Under World Trade Organization rules we have agreed to limit our tariffs on products to “bound rates,” and any increase above those rates violates WTO rules.
We also have “most favored nation” commitments, which precludes WTO members from treating one WTO member worse than other members. (There are exceptions to this rule, including preferential treatment in the context of free trade agreements such as NAFTA.)
Trump’s proposed tax increase on Mexican products clearly violates both of those treaty commitments.
The North American Free Trade Agreement has similar prohibitions, including its Article 302, which prohibits the United States “from increas(ing) any customs duty.”
Mexico could sue the United States before the WTO to challenge the illegal tax. Mexico would be authorized to impose retaliatory duties equal to the harm caused by the violation. (Mexico could sue under NAFTA as well, and when it succeeds, suspend US NAFTA benefits.)
So if Trump imposes a 20% ($59.2 billion) tariff on $296 billion worth of Mexican imports, Mexico could legally impose the same amount on US exports to Mexico. Every dollar we illegally tax on Mexican products is a dollar that Mexico can lawfully tax on US products.
These trade rules were designed precisely to stop the arbitrary and capricious behavior that Trump is proposing. Trade rules provide stability from the winds of political change and raise the costs of illegal behavior such as a discriminatory import tax increase.
The United States benefits from this scheme because we are protected from the same quixotic behavior of others. What goes around comes around, and in the world of trade, reciprocity rules the day.
Like any trade war, everyone loses with Trump’s proposed tariff wall. US consumers lose by paying more for Mexican products. US manufacturers lose due to dramatic increases in their supply chain costs. And US exporters lose when Mexico retaliates (as it surely will) on more than $236 billion in US exports.
When Trump says that Mexico will reimburse us to build a wall, what he really means is that US taxpayers will pay for the wall now, and US consumers will pay for the wall later.