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Yet Another Open Letter to Trump (this one wonky)

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13 January 2018

Pres. Donald Trump
1600 Pennsylvania Ave., NW
Washington, DC  20500

Mr. Trump:

In my open letter to you yesterday [2] (regarding your plan to renegotiate NAFTA in order to get revenue from Mexicans to pay for your border wall) I was intent on making the case that the only way Mexicans can possibly pay for such a wall is for them to export real goods and services – and for Americans to import real goods and services that are used, either directly or indirectly, to build the wall.  That is, I was intent on exposing the contradiction between, on one hand, your belief that imports harm Americans and, on the other hand, your desire to have Mexicans pay for the wall.

I stand by my point that your hostility to imports is inconsistent with your desire for Mexicans to pay for the wall.  Yet in my haste to make this point I neglected to analyze with sufficient care the distribution of the burden of tariffs.  (Presumably, the money that you boast that you’ll get from Mexicans to pay for the wall will come from tariff revenues.)

The burden of a tariff is shared by domestic buyers and foreign sellers.  The tariff hikes that you must have in mind will raise the prices of imports from Mexico.  We Americans will thus buy fewer of these goods and, for the ones that we continue to buy, we’ll pay higher prices.  Some portion of these higher prices will be remitted to Uncle Sam as part of the revenue received from this tariff.  (The precise dollar amount will depend on the size of the tariff and on the relative elasticities of the demands for, and supplies of, these imports.*)  So except in the extreme case of higher tariffs causing no increase in the price of imports, some portion of the revenues that you’ll use to pay for the border wall will unavoidably come Americans.

The other part of the revenue from the higher tariff will indeed come from Mexicans.  On each good that they export to America, Mexican exporters will, after they remit the tariff revenues to U.S. Customs, clear fewer dollars than they cleared before the tariff hike.  For each of the goods that Mexicans continue to export to America, we Americans will, in effect, export to Mexico fewer goods and services.  Thus will Mexicans pay for part of your abominable wall.

In the likely event that you don’t see the obvious, I’ll spell out for you here this relevant reality: because higher tariffs will result in Mexicans clearing fewer dollars on their sales to Americans, Mexicans will have fewer dollars with which to buy American exports.  And, therefore, your protectionist renegotiation of NAFTA will do what you claim to abhor about free trade: destroy particular jobs in the United States.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

* I was at first tempted to say ‘Ask your trade advisors to explain to you this basic economic point,’ but given who your trade advisors are, they likely will be unable to help you.  So find a competent economist – or even a good principles-of-economics student – to explain this matter to you.

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