The Tariff Negotiator

And the tariffs are on pause.  Why?  Because both Mexico and Canada have agreed to Trump's demands on border security.  Access to the US economy is like one of Willy Wonka's golden tickets and Trump leveraged that golden ticket to get our neighbors on board with his new border policies.  Though there was a blip of resistance with claims of counter tariffs, that was nothing more than face-saving bluster.  As pointed out in an earlier blog, the US accounts for a huge portion of Canada and Mexico's economies whereas they are just a sliver of ours.  They were kittens meowing at a lion.

To guarantee follow through on these promises, Trump has only paused the tariffs.  Let's not have those agreements where we live up to our end while the other side doesn't.

It is funny that so much was made of Trump's tariff threat after he had used it so successfully against Colombia.  Will there be as much shock and dismay when next he rolls out his tariff tactic?  Probably.

On Threat of Tariff

President Trump warned that he would levy tariffs, and he has done just that.  Colombia refused to accept repatriated Colombians.  Have a tariff.  Canada and Mexico aren't securing their borders with the US.  Tariff.  China is still enabling the Fentanyl trade.  Tariff.

Though Trump has claimed that these countries would be paying into the US treasury with these tariffs, that is looking at the tariff backwards.  If Canada was selling widgets in the US for $10, but now they are $12.50 thanks to the tariff, who is paying the extra $2.50?  Well, the customer.  That would be the American who chose to buy the Canadian widget despite the price increase.  So, does this just make the tariff self-defeating?  No.  Widget buyers in American will now be more likely to buy American widgets or maybe Italian or German widgets, which are now cheaper than the Canadian widget.  Overall, the number of widgets - and other products - that Canada sells in the US will drop.  The higher the tariff goes, the greater the fall in sales of Canadian goods.

Let's look at the big picture.  Canada exports approximately $500 billion in goods to the USA, while the US sends about $450 billion to Canada.  Now, that $500 billion accounts for almost one quarter of the Canadian economy.  By contrast, the $450 billion is only 2% of the US economy.  Who has leverage here?  A trade war between the US and Canada will be devastating for one and barely an inconvenience to the other.

How about Mexico?  Mexico exports $493 billion to the US while importing only $362 billion from the US.  That means 35% of the Mexican economy counts on US trade while less than 2% of the US economy depends on exports to Mexico.  Which party should be more eager to prevent an interruption in the status quo?

Many countries have based their economies on selling to the US, because the US is the biggest economy.  Being on the receiving end of a trade war with the US will be a heavy blow to their economies.  The tariff is not meant to be implemented long term.  It is a negotiation tool that encourages our trade partners to implement our preferred policies.

The Border Wall Tariff

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.