The White House recently unveiled a plan to build Trump’s “big, beautiful” border wall on Mexico’s back without the country’s consent. According to a Trump spokesperson, the wall will get the money via hefty border taxes on Mexican goods.
President Trump has repeatedly threatened to hike import tariffs on Mexican goods that come in the U.S. White House press secretary Sean Spicer announced Thursday that the U.S. plans to impose a 20% import tax on all goods made in Mexico. Spicer estimates the measure would raise $10 billion every year for the border wall.
The U.S. and NAFTA
However, there is a catch. The United States will first need to withdraw from a free-trade agreement called NAFTA before it can impose any taxes on the agreement’s signatories – Mexico and Canada. Experts also say that even if the U.S. abandoned the trade treaty, the burden of the new tax would largely fall on U.S. consumers’ shoulders.
Yet the new administration is poised to set a 20% tariff for all Mexican goods entering the U.S. The tariff however does not target only Mexico. The White House wants the hefty border tax put on all goods from countries with which the U.S. has a trade deficit. This includes Mexico, Canada, China, Germany, and Japan, which are also the nation’s top five trading partners.
Economists pointed out that a 20% tariff would increase the cost of a $100 good to $120. While Mexican companies could offset the tax by bearing some of the added cost, the new costs will likely be passed onto U.S. consumers.
Economists said Trump’s policy to make foreign goods more expensive to encourage U.S. production and job growth proved to be a failure in the past. The U.S. imports goods mainly because other countries produce those goods more cheaply than U.S. companies can. So, the move would just gut the market.
The Plan Might be a Potential Disaster
Experts also think it could hurt the economy as a similar economic policy did in the 1930s. Back then, the Smoot-Hawley tariffs raised import taxes to historical levels to shield local farmers against foreign competition. Instead, the new tariffs discouraged world trade and sparked numerous trade wars. In only five years, global trade shrank 66 percent, making the Great Depression worse.
The U.S. can start imposing new tariffs after six months if it abandons NAFTA this month. After that time has passed, Trump can set new import taxes without congressional approval.
Experts expect many in the U.S. to oppose the taxes including some companies, the GOP, and even people in Trump’s Cabinet who favor free trade. It is also likely the president won’t carry out his plan completely as his negotiating style is to resort to threats to later settle for a less damaging compromise.
However, threatening your major trade partners with new tariffs could send financial stock reeling, halt investments, and bite deep into the dollar and U.S. commodities.
Last year, the U.S. imported about $300 billion in Mexican goods. This means the new tariff would raise $60 billion every year. Spicer, though, said it could raise $10 billion, but that happens if the U.S. taxes the trade deficit not imports. Yet one can tax only imports not a trade deficit. So, the plan needs a more careful development.
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