This is where it gets dicey.
While president-elect and now president, Donald Trump has threatened new “border taxes” on products from Mexico and China if other reforms don’t take place. Now he seems to be proposing a specific tax on imports from Mexico, to pay for the wall he wants to build along the Mexican border, which could cost between $10 billion and $30 billion. Trump says he wants Mexico to pay for the wall, but such a border tax would fall largely on American consumers and US companies. And it could hurt the overall US economy rather than helping.
White House spokesman Sean Spicer told reporters on Thursday that a plan “taking shape” would put a 20% tariff on Mexican goods imported to the United States. There are no such taxes now, since both countries are part of the North American Free Trade Agreement, which eliminates tariffs. A new 20% tax would raise the cost of a $100 product to $120. The importer could bear some or all of the added cost, by keeping the price at $100 and paying the tax in full. But sellers always try to pass new costs onto consumers, and some or much of the cost increase would probably come from consumers’ wallets.
Trump’s threat of tariffs are the part of his economic plan business leaders and economists hate the most. Trump’s goal is to make imports more expensive in order to spur more production in the United States, where costs are almost always higher than in other countries because workers get paid more. But many economists say tariffs are a misguided way to encourage more US manufacturing, and could end up doing more harm than good. The Smoot-Hawley tariffs in the early 1930s are a notorious example of a horrible economic policy that triggered damaging trade wars and made the Great Depression worse, not better.
Trump can’t impose new tariffs on Mexico right away. He’d first have to officially inform Canada and Mexico of America’s intent to withdraw from NAFTA. If nothing changed, the United States would exit the treaty six months later. At that point, Trump could begin imposing tariffs—largely without any new legislation from Congress. Spicer indicated new tariffs might be part of a big tax-reform bill expected from Congress this year, but trade experts say Trump wouldn’t need a new law. He could largely impose tariffs on his own.
[Related: How Trump can get his way on tariffs.]
Whether that would be smart is another question. There is bound to be aggressive pushback to the whole idea from many industries, plus Republican members of Congress and even some of Trump’s incoming Cabinet members, who favor free trade and oppose tariffs. Trump’s negotiating style, as many are learning, is to threaten draconian consequences then settle for some compromise that’s less disruptive. On the other hand, the mere threat of tariffs might put business plans on hold at dozens of big companies, spook financial markets and wreak havoc with the value of the dollar and commodities dependent on future expectations of inflation.
The United States imported roughly $300 billion worth of products from Mexico in 2016. Twenty percent of that would amount to a $60 billion tax on some combination of Mexican exporters and US consumers. Spicer suggested a lower number, saying the 20% tariff would only apply to the amount of the trade deficit and total $10 billion or so. But you can’t tax a trade deficit, you can only tax actual imports. Further clarifications by Spicer seem to indicate the whole idea needs to be developed more carefully.
Keep in mind, many of the Mexican exporters are American companies such as General Motors (GM) and Ford (F). So higher taxes on them would lower profitability and perhaps dent their hiring plans in the United States.
Here are the biggest categories of imports from Mexico, according to government data for 2015:
Trucks and buses ~ $29 billion per year
Passenger cars ~ $23 billion
Computers ~ $15 billion
Telecommunications equipment ~ $14 billion
TVs and video equipment ~ $13 billion
Crude oil ~ $12 billion
Engines and engine parts ~ $9 billion
Appliances ~ $7 billion
Industrial machines ~ $7 billion
Vegetables ~ $6 billion
To ballpark a few things that might change if a 20% tax went into effect: The cost of a $600 dishwasher made in Mexico would rise to $720, a $1,000 computer would rise to $1,200 and a $20,000 automobile would rise to $24,000.
Trump’s theory is that higher prices would quickly spur new investment in US factories, and the new jobs created here would somehow offset higher prices paid by consumers. But many economists don’t see it that way. Manufacturers might seek other low-cost countries instead of moving production to the United States, and if Trump taxed those imports too, some producers might just stop making goods they can’t earn a guaranteed profit on at America’s high labor costs. Or, they could relocate production to the United States but seek aggressive new ways to automate, so they’re less dependent on costly labor.
Meanwhile, countries hit with new tariffs on imports to the United States are likely to impose their own tariffs on American imports, which would hurt Americans, too. Americans buy more Mexican products than vice versa, with an annual trade deficit of more than $60 billion during the last 12 months. But American producers still export about $230 billion worth of goods to Mexico, and at least some jobs involving those products would be imperiled.
Or, maybe Trump is bluffing and he’ll settle for something far less onerous. And perhaps his promises to cut taxes and slash regulation would offset damage done by trade protection, if they get through Congress. Thing is, when things change, there are new winners and losers, and the losers often don’t see it coming. The losers under new tariffs won’t all be south of the border.
Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.