President Trump has floated the idea of a 20% tariff on Mexican imports, the proceeds would then reimburse the cost of the wall. Sound policy? No. Tariffs typically harm the consumers in the country imposing the tariff. Why? Let us suppose that Pittsburg Manufacturing Group (PMG) in Pennsylvania makes widgets for $10 each. The primary competitor to PMG is Frabrica Baratija de Coahuila (FBC) in Saltillo, Mexico. They also produce widgets for $10. Now impose a 20% tax on the FBC widgets. Obviously, the price of an FBC widget in the US will rise to $12 and PMG will start to dominate the market. However, PMG will also be able to raise the price of their widgets without fear of being undercut by FBC. Thanks to the tariff, Americans will pay more for their widgets. Wait, who is paying for the wall again?
Tariffs are a protectionist tax policy that imposes a barrier to trade. It can improve the profits of those businesses protected but at the expense of the consumer.
Of course, this might just be Trump doing the equivalent of saber-rattling on trade. Such a tariff could devastate the Mexican economy. Let's suppose the wall will cost a gazillion dollars but Mexico earns $10 gazillion in trade with the US. Just paying for the wall would be cheaper than the proposed tariff. But even in this rosy scenario, American consumers are paying for the wall via the purchases made from Mexican manufacturers. Mexico paying for the wall will be a case of accounting legerdemain, much like how your employer 'matches' your contribution to Social Security and Hollywood mega blockbusters barely breakeven.
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