So President Donald Trump is involved in another “dust up” regarding his insistence on “building a wall” on our southern border to stop the flow of illegal immigrants and illegal drugs AND his insistence that one way or another Mexico will pay for “the wall.” The President of Mexico, Enrique Pena-Nieto, has insisted that Mexico will not pay for “the wall.” The OMG crowd in the mainstream media went nuts when it was disclosed that an upcoming meeting between Mr. Trump and Mr. Pena-Nieto was cancelled due to the conflicting positions of the two national leaders.
In the aftermath, Mr. Trump indicated that he wanted to go “a different way” and his Press Secretary Sean Spicer floated the idea of twenty percent tax on imports from Mexico as a way to pay for “the wall.” And that drove the OMG crowd even nuttier as they claimed that such a proposal would require Americans to pay for “the wall” through higher prices on Mexican goods.
There are two profoundly dismaying things about the media responses.
First, the acknowledgment by the mainstream media that increased taxes have an effect on prices. What makes that stunning is that the overwhelming majority of the mainstream press has never once noted that increased taxes on businesses are actually paid by consumers through high prices. In fact, quite the opposite. Tax increases after tax increases are proposed year after year by Democrats and the mainstream media parrots their liberal partners by regurgitating the same old saw that “businesses don’t pay their fair share.” But that is the mainstream media – they begin with a preconceived narrative (open borders) and then seize upon incomplete or isolated factoids to embellish that narrative.
Second, how much do you know about the economic relationship between the United State and Mexico? No matter how little you know it is substantially more than the vast majority of the mainstream media reporting on it. Let’s remember that those low information members of the media are neither very bright nor very well educated. (A review of a variety of studies relating to intelligence (as measured by IQ and Graduate Record Examination) reflects journalism’s relatively low standing. A report authored by Rita Neumann in September of 2016 for Magoosh GRE Blog placed Journalism in the lowest category with a score of 150 in Verbal Reasoning, 149 in Quantative Reasoning and 3.7 in Analytical Writing.)
It is that lack of understanding that causes the mainstream media to deal with proposals such as the tax on Mexican imports in such a mono-dimensional way. (Yes, all things being equal, higher tariffs will result in higher prices which will be paid by American citizens.) But all things are not equal. There are a significant number of factors – none of which are discussed by the mainstream media that will effect this and all of which effect the variety of options available to Mr. Trump in wresting payment for “the wall” from Mexico.) Following are just a few:
Economic Size. The United States has the largest economy in the world as measured by Gross Domestic Product (GDP) at $18.6 Trillion compared to Mexico at$1.06 Trillion. Exports from the United States to Mexico are measured at $239 Billion while imports from Mexico are measured at $295 Billion resulting in a trade deficit of $56 Billion. (Imports from Mexico to the United States constitute almost three-quarters of Mexico’s exports to all countries.) In relative size to GDP imports from Mexico represent 1.6% while imports from the United States represent over 22%. Were a trade war to develop between the United States and Mexico, Mexico would lose it overnight.
Impact of a twenty percent tariff on goods from Mexico. Applying simple mathematics to the current import levels would produce $60 Billion – that is four times the amount estimated to build the wall. However, only a simpleton will assume that simple math would provide a reasonable answer. But that is precisely how the simple minded in the mainstream media and the Congress evaluate such actions. The effect of any price increase on the sale of goods needs to be measured by regression analysis. A regression analysis includes elasticity of demand – basically will a price change effect the demand for the product. It includes other variables such alternative sources, substitute or alternative products, etc.
Most Mexican goods imported are fully elastic – there would be a significant reduction in demand to any given price increase because most of the goods imported from Mexico are readily available from other nations, a twenty percent tariff on Mexican goods would result in a transfer to other source nations and virtually no impact on the price that United States consumers would pay for substitutes. In other words, United States consumers would simply find another source and demand for Mexican products would virtually dry up.
Since a tariff in this instance is designed to extract action on the part of Mexico, you would want the tariff to be high enough that it had an immediate and dramatic effect on the Mexican economy with as little impact on the American economy and consumers as possible. Twenty percent sounds like a good number that should extract concession before too much damage is done to the Mexican economy.
Alternatives. There are alternatives available to Mr. Trump. The United States provides hundreds of millions in foreign aid, grants, programs and other payments to Mexico. Mexico provides none to America. All or portions of those payments could be redirected to pay for the wall.
There are approximately one million legal border crossings each day between the United States and Mexico – about an even number going each way. A head tax for each crossing in the amount of $2.00 would produce $2 Million per day or $730 Million annually and would provide a fair portion of the cost of building the wall. Add to that a $10 fee for vehicle crossing at 400,000 per day and the figure would rise by $1.46 Billion per year to $2.19 Billion per year.
Oil production is a significant part of the Mexican economy and it is controlled by the government through Petroleos Mexicanos. The annual amount of oil imports to the United States exceeds 760,000 barrels per day or 277,400,000 per year. A $1.00 per barrel reduction would produce over $275 Million per year.
There are any number of means for extracting payment for the wall based on the disparity of economic effect between the United States and Mexico. The spread of cost recovery over a five year period would suggest that Mexico should a method that preserves its politicians’ egos but remedies a problem for which they are primarily responsible.
However, negotiating is not for the faint of heart, the cloying politicians nor the low information media. Negotiating is for the experienced and the knowledgeable. My money is on Mr. Trump.