Economy & Budget

With import tax, we pay for the wall, not Mexico

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President Trump’s rapid-fire announcement that he wants to build that wall, followed by White House Spokesman Sean Spicer’s comment that the wall could be paid for by a 20 percent tariff on imports from Mexico, stunned many.

I suppose that we should not be surprised; we had been warned. Still, it feels like a punch in the gut.

{mosads}I will not speculate here about whether either proposal will actually be adopted. That is far beyond my humble powers. As a preface, I will say that I find the politics of bullying our southern neighbor and the racism unleashed by the whole wall narrative repugnant.

But in this space, I will confine myself to matters that I can address as an economist — the basic contours of U.S.-Mexico trade, the implications of a 20 percent tariff, and the economic effects of building a wall.

Such a tariff would certainly hurt both sides. It’s highly likely a trade war could break out, with Mexico imposing tariffs on U.S. goods. But, let us set that aside and simply discuss the consequences of U.S. tariffs on Mexican goods.

Foreign investors would be less likely to locate in Mexico, avoiding the tariff by producing in other countries. Mexico would lose jobs in industries that export to the U.S., and this would set up a cascade of damage to its economy.

U.S. automakers will be up in arms since they rely on Mexican plants for assembly and parts. According to the U.S. Trade Representative, in all, some 1.1 million U.S. jobs depend on exports to Mexico.

This brings us to the broader theme — how has U.S.-Mexico trade affected the U.S. economy? Further, what has been the role of NAFTA?

In an article on the 20th anniversary of NAFTA is 2014, my colleague at American University, Robert Blecker, offered a balanced assessment. He pointed out that both Mexico’s exports to the U.S. and American exports to Mexico rose very rapidly after NAFTA went into effect in 1994, but only until about 2000.

At that point, as Kevin Gallagher, a professor in international relations at Boston University, and Enrique Dussel Peters, a professor at the National Autonomous University of Mexico, put it, an uninvited guest came to the party — China.

The increase in Chinese exports to the U.S. market dwarfed that of Mexico after 2000. Citing several other scholars, Blecker concluded that competition from Chinese goods led to something like 10 times as many manufacturing job losses in the U.S. after 2000 than competition from Mexican goods.

Of course, saying that Mexican exports had smaller impacts on the U.S. economy than Chinese exports did is not the same as saying that NAFTA was beneficial. However, a one-sided focus on manufacturing job losses misses the benefits of NAFTA.

U.S. consumers enjoy cheaper goods due to free-trade agreements like NAFTA. Sen. Lindsey Graham (R-S.C.) noted that he did not want to give up cheap tequila and Corona. Kidding aside, this is not to be dismissed as support for empty consumerism.

As a percentage of their purchases, the poorest quintile of consumers get much more of a price benefit from imports than do richer groups, precisely because poorer people consume cheaper goods. Free trade’s distributional effects are not all anti-poor.

The other major beneficiary of freer trade with Mexico have been a significant number of U.S. companies. Those who export to Mexico, as well as those who use parts and components made in Mexico (e.g. the auto companies mentioned above) benefit.

These benefits may not even show up directly in the bilateral U.S.-Mexico trade figures. That is, if a U.S. company is able to make a cheaper car thanks to parts or assembly in Mexico, it may sell the car to Canada or some other country.

This is another reason why one has to be very careful when talking about bilateral trade deficits rather than the trade deficit with respect to the rest of the world.  

This was a quick tour of the benefits of NAFTA to the U.S. Looking at both the costs and benefits of NAFTA, it seems to me that the balance is neither strongly negative nor strongly positive for the United States.

NAFTA has had impacts, but, overall, it has neither been a great boon to the U.S. nor a major disaster.

Further, the recent political focus on job losses misses a big part of the picture. Opponents of free trade agreements focus on job losses, but do not discuss our own failure to help those who have lost jobs find new employment.

The U.S. Trade Adjustment Assistance program originated under the Kennedy Administration and has never been effective enough to help those displaced by free trade.

We can do better. U.S. retraining programs are underfunded, unsystematic, and poorly suited to help the population affected; a population that tends to be relatively old and often without college education.

Designing better mechanisms would be a major task, but not impossible. It would require a government that truly cares about blue-collar workers rather than using them in a dog and pony Twitter show of announcements about “jobs created”.

Now, what about that wall? Its cost sounds large, but we should remember that $15 billion is just 0.1 percent of U.S. GDP.

The problem is not the cost; it’s the opportunity cost. Think of what could be done with $15 billion. Put that toward improving higher education, infrastructure, medical research, or renewable energy. Any of these alternatives would bring our country far greater benefits.

Economists argue about the exact impact of immigration on the wages of U.S. workers. Some argue that increased immigration has lowered the wages of unskilled U.S. workers; others find no effect.

Both sides actually agree that increased immigration does not affect the wages of the vast majority of U.S. workers, does not create significant unemployment, and, generally, has fairly minor impacts on the U.S. labor markets.

In a nutshell, most illegal immigrants work at jobs that U.S. citizens just do not want.

Furthermore, some segments of the U.S. economy are currently highly dependent on illegal immigrants. Illegals are particularly well-represented in farming, including dairying. An effective crackdown on illegals would hit these farms, and U.S. consumers, hard.

Construction of the wall might open up some jobs during the construction process, but so would many other possible uses of the $15 billion dollars.

Better security in border regions could improve the economic situation of border communities, and lower anxieties and tensions, but it is not at all clear that a wall would really improve border security.

With luck, we will have a full discussion of that issue in the weeks and months to come. Somehow, I doubt that the discussion will really be thorough or useful in the current political climate.


Evan Kraft specializes in the economics of transition, monetary policy and banking issues as a professor at American University. He served as director of the research department and adviser to the governor of the Croatian National Bank.


The views of contributors are their own and not the views of The Hill.

Tags economy Free trade International trade Lindsey Graham Mexico North American Free Trade Agreement Trade Adjustment Assistance Trade policy
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