A lot of people are saying that a 20% tariff would mean higher prices for Americans and that we would be paying for the wall, not Mexico. Pull up a cigar. We’re about to talk economics.
Jon posted a meme on our page the other day. He is really good with these.
This meme isn’t saying a tariff is passed off to the consumer. This meme is saying how it’s funny people are now realizing that when the government imposes taxes/regulations/etc, there are often some not so good effects, and the same people who are now recognizing/admitting these not so goods effects of a tariff, are a lot times the same people who do not recognize/admit the not so good effects of something like a minimum wage.
But back to the question at hand: Who will pay for Donald Trump’s wall? The answer is it’s hard to say. Economics is not a certain science. This is why it is so important to study praxeology and understand purposeful behavior so we can begin to deduce what the possible outcomes from such a policy (in this case, tariffs) might be.
But from what we can deduce and also gather from historical evidence is that almost everybody will be paying for Donald Trump’s wall: both Americans and Mexicans, along with all other people taking part in the global economy.
A large part of what determines who will bear the burden of the tariff depends on who is most sensitive to price. If Americans don’t mind paying more for an avocado, then the cost will be passed on to us, the people who eat the fruit. I believe avocado is a fruit. It might be a vegetable. But if we do mind paying more for an avocado, the cost is sent back through the supply chain, hurting the people who produce the fruit.
So to say who will be paying for the wall depends not only on the amount of the tariff but on every good/service to which the tariff is applied. It is therefore very conceivable and also very likely that in some cases the cost will be passed on to the consumer and in some cases to the producer and in some cases both. Again, we will all share in the cost.
“But what about all the American jobs this tariff will create,” says somebody on Facebook.
Well… here is what I said to THAT person:
“It’s not so simple. Even if all else equal, and the tariff promoted people to “buy American”, we would all be worse off for it, aside from those in a few, select industries. We would be giving up the comparative and competitive advantages that enable consumers to benefit from more choices and lower prices.
In the same way it benefits YOU to not try and produce everything you need within your own household, but to trade with other people/households/business/countries, it holds true for any country to not try and produce everything that country needs within its “own” household.
I don’t deny you’d be giving yourself/your family more jobs/work by trying to build your own refrigerator, grow your own food, etc. But I don’t think the benefits of “having more jobs at home” would outweigh the costs of, well, having to build your own refrigerator, grow your own food, etc.
As nice as it sounds to promote American jobs, we don’t want to do so when the result is higher prices and less choices for everyone.
Also, there is no guarantee people will adjust their buying behavior automatically to American goods/services. A large degree of this depends on what the product is and who is the most sensitive to price. If people in America don’t mind paying more for an Avocado, then it is US who pay the tariff. If on the other hand we DO mind paying more for an avocado, then it is the producer who takes the tax. That, or we find a new supplier, and of which there is still no guarantee that supplier will be American. In the case of avocados, it is unlikely that supplier WOULD be American. More likely we would go to Chile, Indonesia, maybe even the Dominican Repub.
So unless you are willing to slap tariffs on all countries, and on all imports, to the degree that it no longer offers ANY advantage to engage in trade with other nations, there is no guarantee that these policies will result exclusively in American jobs, and I hope that you can see if we were to do something of such significant ignorance, that we would be FAR worse off for it, no matter how many jobs it created here at home.”
PS – The other side of this, which we also have to take into account, is the political side.
Who knows how Mexico will react to this. Maybe they’ll see the tariff as being more trouble than it’s worth and start sending checks for the wall. If there’s one thing we know about Trump it’s that he’s a man who drives a hard bargain.
So yes, while protectionism is bad, and free trade good, protectionism on just one side is also bad. So maybe with Trump playing Mr. Tough Guy and imposing ideas that in effect would result in LESS free trade, may actually, in effect, result in MORE free trade, because neither side feels the cost of a trade war is worth it. This is purely speculative. But not inconceivable.
PPS – You might also enjoy our free eBook, because you might need the extra money to help pay for the wall.