Written by John Lounsbury
President Donald Trump today said that a 20% tax on imports from Mexico will pay for the wall. So much for Mexico paying for the wall. You and every other American citizen will pay for the wall through higher prices when you shop. Mexico will pay nothing directly.
It is true that Mexico may “suffer” with the proposed action because Americans may buy less from Mexico. But American businesses will also suffer. This proposal is a “pain” all the way around.
U.S. Imports from Mexico
The U.S. buys more than $90 billion a year in truck and auto related products from Mexico; U.S. exports to Mexico in those categories are about $26 billion. So there is a net deficit here of about $68 billion. The total trade deficit with Mexico is less than that (about $60 billion), so all other trade has a net surplus for the U.S. The total imports from Mexico last year were about $295 billion and exports to Mexico were estimated at $235 billion. The breakdown of the trade is shown in the following graphic from MarketWatch.
Pain in Mexico
The proposed tariffs will cause some dislocations in Mexico. If a 20% price hike for cars from Mexico cause American consumers to buy less of them, Mexican car production may be curtailed. Motor light-vehicle production in Mexico has the following component markets: Total production in Mexico 3.22 million units (2014); 1.15 million new vehicles sold in Mexico (2014); 2.07 million units exported, 70% (1.44 million) to the U.S. (2014). Exports to the U.S. will undoubtedly be singificantly reduced and auto production in Mexico likely reduced accordingly,unless other export markets are increased.
Pain in the U.S.
About half a million used cars are exported by the U.S. to Mexico each year. This will undoubtedly be greatly reduced if new cars from Mexico fall in number. This might have an effect of depresing used car prices in the states, a benefit for used car buyers but not so for sellers. The bigger pain will be in all the other areas of trade where the U.S. has had a surplus with Mexico, as well as drastic reduction in auto sector exports by the U.S.
On Balance, Both Countries will Lose
When trade barriers are erected, the losses flow both ways. We assume that President Trump thinks this aggressive action will result in new trade deals. He may rationalize the pain will be worth the ultimate outcome. That is a big assumption on his part. And the bottom line is that the American consumer will pay the cost of the wall directly.
Bottom Line
Americans: Donald Trump plans to bill you for The Wall.
