If I have learned one thing since August of 2015 it is this; do not bet against Donald Trump. When he declared his candidacy for the office of the presidency, most of the country (and the world) had a good laugh at his expense. He is currently enjoying the last laugh on that matter.
His unconventional rise to power defied all political laws, and turned traditional Republican philosophy on its head. He has made foolish the wise, and rewritten the playbook for American politics. For this reason, he deserves the benefit of the doubt on most of his decisions.
Trump has proven time and time again that there is more than one way to skin a cat, and more than one way to suit said cat pelt as a hair piece. However, his proposed border tax policy should give pause to every student of history. At the risk of having my name added to a long list of people Donald Trump has proven wrong this year, I make this declaration; there is no reinventing the wheel when it comes to global economics.
For generations, conservative Republicans have championed the merits of free trade. Admittedly, it has failed. Manufacturing has left the U.S., and we post massive trade deficits with many countries, such as Mexico. Trump keenly observed this, and hit a nerve on the campaign trail with a promise to fix it. The problem is, he is ignoring history and economics with his solution.
Trump thinks that a 20% tariff on goods imported from Mexico will equate to the Mexicans paying for the wall. Sounds good, right? Unfortunately, history has proven that isn’t how tariffs work. A government cannot tax another government. It can only levy taxes on its own people. This tax hike will not be paid by the Mexican government, it will be paid by the American companies importing their goods from Mexico. This will raise their cost of doing business in Mexico, but it is nothing compared to the costs of doing business in an America laden with strict, costly regulations, the world’s highest corporate tax rate, and a unionized labor force. So it will not be nearly enough to convince those companies to move their factories out of Mexico.
But someone will have to foot the bill for these tax hikes. I’ll give you a hint, it won’t be the wealthy executives. The hikes will be passed on to the American consumer through a rise in the cost of finished products. Throughout history, this has lead to decreased demand/ability to pay for the affected products, and then layoffs of the American workers who did contribute to the product because the company isn’t making enough money. The last time the U.S. passed a tariff of this nature was 1930. It was a major contributor to the Great Depression.
If Trump wants to bring home manufacturing, and increase tax revenues to pay for his wall, all he needs to do is continue the steps he’s already taking to cut taxes and regulations. Corporate welfare and government intervention into international markets scarcely ends well for anyone.
In short, it is actually possible that yet another lampooned Trump proposal will come true. Mexico might actually “pay for the wall”. But what will it cost the rest of us?