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It’s More Complicated

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I was too hasty in this post yesterday [2] explaining that much of the cost of Trump’s border wall, if funded with a tax on imports from Mexico, will be paid by American consumers.  I said in that post that the bulk of the revenue for the wall funded with such a tax will be paid by Americans.  That claim might well be correct.  But it is possible that a large amount, although – contrary to what Trump and his team want Americans to believe – not all of this cost will be paid by Mexicans (in the form of their own lower returns on sales to Americans and lower wages).

Owners of capital in Mexico are almost certainly not now earning excessively high rates of returns on their investments in factories that produce goods for sale to Americans.  Not only must they compete against each other, but also against manufacturers in other countries.  So investors in those Mexican factories cannot afford to absorb much of the tax burden.

If American consumers can easily switch from buying Mexican-made goods to buying very similar goods at only modestly higher prices from non-Mexican producers, then American consumers won’t contribute, through Trump’s tax, the bulk of the revenue for building the wall.  So if this tax will indeed raise the revenue required to fund the building of the wall, Mexican producers will have to swallow hard and accept much lower rates of return or the wages of Mexican’s working in these industries will have to fall substantially.

The former is unlikely; the latter is more likely.  (By the way, If the latter happens, one result will be a greater desire of Mexicans to emigrate to the United States.)

But if Mexican producers can easily switch their sales to Canada or other countries, then – to this extent – they avoid having to pay the tax and, if the tax is to be paid, American consumers must pay it.  The easier it is for Mexican producers to switch their sales to other countries, or to switch their capital into other industries not as dependent upon exporting to the U.S., the greater will be the burden of the tax paid by American consumers.

The longer the time period, the greater is the ability both of Mexican producers to find alternatives to selling higher-taxed goods to Americans, and of American consumers to find alternative sources of supplies.  In the long-run, with this tax kept in place, there will indeed be fewer imports into the U.S. from Mexico and we Americans will be paying higher prices for goods that we buy from Mexico (and for similar goods that we buy from elsewhere).  It’s possible that Mexicans, not Americans, will contribute the majority of the revenue toward paying for Trump’s egregious wall.

But an assumption that I had in mind when I wrote yesterday’s post, but didn’t state, is an assumption that Trump and other protectionists seem to make about imports from Mexico.  (I myself think this assumption to be wrong, but I implicitly granted it for purposes of the post.)  The assumption is that, especially because of NAFTA, American consumers can buy from Mexican exporters goods at (as Trump might say) fabulously, ridiculously low prices.  That is, the prices at which Mexicans can sell their exports to Americans are now so low that Americans have no other option that’s close to being as good as their option of buying those goods from Mexico.  NAFTA, remember, according to Trump is an “unfair” trade deal for Americans.  Americans are getting, supposedly, uniquely low prices on Mexican goods.

If this assumption is correct – that is, if it’s true that we American consumers, especially because of NAFTA, are now paying uniquely low prices for the imports we buy from Mexicans – then our next-best option for these goods is one for which we would pay prices significantly higher than we are now paying for our purchases from Mexico.  A tax on top of these low prices still, then, leaves Mexican imports a reasonably good option for Americans.  Trump’s proposed import tax would then fall heavily on American consumers.

All that said, the bottom line is more complicated than what I carelessly, in my haste to slam Trump’s proposed tax, suggested in yesterday’s post.  Some of the burden of the tax will fall on Mexicans, and some will fall on Americans.  But I was mistaken to leap, without more explanation, to the conclusion that the bulk of the tax will be paid by Americans.  Perhaps the bulk will fall on Americans, but perhaps not.

Either way, it is simply not true that this tax will be paid exclusively by the Mexicans.  Some portion of this tax – I believe a hefty portion (especially if Trump succeeds in raising barriers to imports from China and other low-wage countries) – will indeed be paid by Americans.

UPDATE: In the comments section, Bill Woolsey is correct about quasi-rents in factories located in Mexico.  To the extent that quasi-rents exist there, Trump’s tariff can seize some of those to help pay for his wall.

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