President Trump and his inner circle of nativist, protectionist advisers have never been responsible for dealing with the consequences of their ill-conceived and economically illiterate notions. Now in the White House, they careen from one ill-thought-out gesture to another, demonstrating to every nation on the planet that the administration is erratic, unreliable and lacking good economic sense.
A deep rift opened Thursday between the United States and its southern neighbor as the Trump administration pressed forward with a plan for a giant border wall and insisted that Mexico would pay for it, possibly through a U.S. tax on imports.
President Enrique Peña Nieto on Thursday called off a trip to Washington after emphasizing that Mexico would not finance the wall. Hours later, Trump’s press secretary, Sean Spicer, said the border barrier would be funded by a 20 percent import tax on goods from Mexico.
After that raised a ruckus and provoked an outcry from Democrats and Republicans, Spicer tried “to backtrack, telling reporters that the tax was ‘one idea’ to pay for the wall and that his intent was not to ‘roll out’ a new policy. He said it could be part of a broader import tax plan backed by some House Republicans.”
Which was worse: provoking Mexico and bobbling the message (threat?) or the economic inanity on which the administration’s economic policy seems to rest? Let’s focus for now on the policy:
[NAFTA] has allowed trade between the neighbors to mushroom. Every day, goods valued at $1.4 billion cross the U.S.-Mexico border, and millions of jobs are linked to trade on both sides. Mexico is the world’s second-largest customer for American-made products, and 80 percent of Mexican exports — automobiles, flat-screen TVs, avocados — are sold to the United States.
The import tax idea floated by Spicer, which he claimed could raise $10 billion per year to pay for the wall, could be met by retaliatory action from Mexico.
Moreover, U.S. consumers would pay the cost in the form of higher prices. Cato Institute economist Dan Mitchell explained via email: “Setting aside the issue of whether a fence makes sense from a cost-benefit perspective, unilateral tariffs would put the cost on American consumers, not to mention the potential harm to American exporters after the [World Trade Organization] gives Mexico the right to impose retaliatory duties.”
House Republicans nervous about Trump’s tariff have come up with something nearly as bad: a border tax. House Speaker Paul D. Ryan’s office insisted that Trump’s 20 percent tariff was consistent with its border tax. But wait. The border tax idea applies to all imports under the House Republicans’ scheme. So in what sense would Mexico be paying for the wall?
The border tax concept in general makes little sense. A Democratic staffer provided this analysis:
So, for example, Target pays $40 to manufacture and import a sweater made in China and sells the sweater in the U.S. for $60. Under the current system, they would pay a 35% corporate tax on their pre-tax $20 profit, so their corporate tax would be $7 and their after-tax profit would be $13. Under the [House GOP plan], they would not be able to deduct the cost of producing the sweater in China (since it’s an import) and would have to pay 20% on the total sale, not just the profit. So they would pay 20% on the $60 final purchase price of the sweater, creating a $12 tax liability and reducing their after-tax profit to only $8. In order to restore their profits, it’s more than reasonable to assume they would increase the price of the sweater to offset any profit loss due to the new tax system. And yes, consumers will have to bear that burden.
How does this make America great again, especially if big companies can localize their manufacturing plants overseas to produce for markets outside the United States? If they cannot deduct the cost of the steel imported to a U.S. car plant but can if the plant is in Asia, the company will obviously choose an Asian location to sell to the Asian market.
You will also note that for Republicans who inveighed against any tax increases, this is in fact a tax hike; in fact, candid Republicans say it is needed to offset other revenue losers in their tax plan. Republicans who claim that on net, tax reform will be a cut are ignoring the giant wealth transfer they are proposing: Working-class people will be paying more for school clothes at Target while Trump’s fellow billionaires get an outsize tax cut. Populism? Hardly.
Indeed the entire concept of a border tax is contrary to the often-stated principle that the government should not pick winners and losers — that is, distort the market. This is the ultimate type of distortion, as Reuters explains:
Retailers selling imported products, like clothes, shoes and electronics, say the border-adjusted tax would increase their costs – which rings true, since some would essentially be taxed on something close to their revenue, rather than their profit, outweighing the benefit of a lower headline rate of tax. The National Retail Federation says the idea would force its members to raise prices for consumers by up to 15 percent. Other industries that rely on imported parts, like the auto sector, could be hurt, too. Gasoline prices could also go up since the tax would apply to oil imports.
Conversely, big exporters including giants like Boeing could benefit disproportionately, while purely domestic U.S. concerns would gain simply from the lower headline tax rate.
The border tax also has another noxious effect: It’s a penalty on Mexican labor in Mexico. Where do we think Mexican laborers will go if Mexican workers have fewer jobs and the Mexican economy goes to seed? In essence, we would be undercutting one of the factors responsible for reversing the flow of immigrants so that more now are going to — rather than coming from — Mexico. (” The Mexican economy has meanwhile strengthened and stabilized in recent years, creating new job opportunities. And the country has greatly expanded its educational system, providing young Mexicans who want to improve their lives with viable alternatives to migrating north.”) The surefire way to increase illegal immigration to the United States is to have a destabilized, economically weak Mexico.
To recap: An unnecessary, exorbitant wall on the Mexico border has alienated a key ally and triggered the president to restate his tariff plan, which is only slightly more objectionable than the House border tax. (“Trump’s blunt approach would not only almost certainly fall foul of WTO rules, it could impede the flow of trade significantly, especially if other countries impose tit-for-tat levies.”) And if that were not enough, the House scheme (not to mention the Trump tariff) would likely have a host of “unintended consequences,” as New York Fed President William Dudley warned earlier in the week.
All of this goes back to Trump’s fundamental misunderstanding about trade. Ramesh Ponnuru observes that Trump’s policy “rests on the enduring mercantilist fallacy that exports benefit a country and imports harm it — the same fallacy that leads many people to embrace full-blown protectionism. The goal of raising exports and cutting imports is actually a deliberate objective of lowering Americans’ standard of living.” And here we thought Trump was going to make America great again.