1/30/17
In the wake of President
Trump’s indications that Mexico
will “pay for the (border) wall” with some sort of 20% export tax, observers are pointing out that it is we, the
American consumers, who will ultimately pay for the wall if the financing
mechanism is indeed some kind of export tax.
As the kids would say, “Well, duh!” Those who raise this argument do so as if they
have suddenly realized some economic truth that is beyond the grasp of Mr.
Trump, whom they consider an idiot on all counts. This low estimation by his opponents of Mr.
Trump’s mental capacity is ceaseless despite the Trump campaign’s making idiots
of those very same opponents who guffawed at the very notion that Mr. Trump
could win the 2016 presidential election, but I digress. The point is that those who assume that Mr.
Trump fails to understand that consumers ultimately pay tariffs and the like
also assume that Mr. Trump has the economic literacy of, say, his opponent in the
2016 election or any other lifelong politician.
Of course Mr. Trump understands that some portion of a tariff is paid by
consumers.
Let me make two technical digressions here. First, note that in the last sentence of the
last paragraph, yours truly said that Mr. Trump understands that “some portion of a tariff is paid by
consumers.” I didn’t say, as do most
commentators on this point, that consumers will pay the entire tariff or that,
as is often said, sellers will “pass along” the cost of a tariff, or any cost
increase, for that matter. Indeed, sellers
don’t “pass along” an entire tariff. The
cost of a tariff is shared by both the producer and the consumer. The proportion paid by each is determined by
their relative elasticities of demand and supply. The party with the lowest elasticity (of
supply in the case of the producer and of demand in the case of the consumer)
will pay a higher proportion of the tariff. In
common English, the seller, in this case Mexico, will pass along what it can
and eat what it can’t. This is rather basic microeconomics.
Whether Mr. Trump and his people understand this fine point I don’t
know, but I am reasonably confident, based on their own statements, that his
opponents don’t grasp this nuance.
Second, we are not talking a straight-out tariff here, or
at least one would think we are not talking about a straight-out tariff
here. Like most of Mr. Trump’s
proposals, this one, too, is vague and probably will remain so until about five
minutes before it’s put into effect.
Currently, however, the talk is that the tax will be structured as an
adjustment to the corporate income tax
in which imports will not be deductible and exports will not be taxed, or
something like that. Or it might be
something else, and no one is sure where the 20% number came from. But so it goes with Mr. Trump; he keeps both
his fans and his opponents, and the great majority of Americans, who are
neither, in suspense. For those of you
who share yours truly’s affection for great old movies “You know how the Premier
likes surprises.”
So Mr. Trump knows, despite the seemingly brilliant
economic observations of his opponents, that any kind of export tax from Mexico
will be paid for, in some proportion, by consumers. Given that knowledge, why does he still
contend that “Mexico will pay” for the wall?
It seems quite obvious: The
export tax is nothing more than a negotiating stance, a stick to prod Mexico to
come up with at least some of the cost of the wall. Mexico, when faced with the choice of either
paying for the wall or seeing their exports to the U.S. taxed, one way or the
other, at 20%, will be a lot more amenable to, shall we say, contributing to
the cost of the wall, than they would be without the incentives provided by
this Damaclesian tax.
As things stand right now, Mexico has no incentive to
contribute anything to the construction of a border wall. The prospect of a tax on its exports to the
U.S. will provide a measure of an incentive.
If it doesn’t, don’t be surprised if Mr. Trump comes up with something
else to incentivize Mexico to see enough wisdom in building the wall to have it
make sense for Mexico to come up with some of the cost. And don’t be surprised if Mr. Trump once again
makes idiots out those who doubtless will continue to question Mr. Trump’s
intellect long after he has made them look silly.
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