Home » Uncategorized » Mexico Paying for the Wall Through Tariffs? Big Factual Boo Boo.

Mexico Paying for the Wall Through Tariffs? Big Factual Boo Boo.

That’s what people are saying at reddit.com/r/the_Donald .

Now don’t get me wrong, I’m pleased with Trump, both by the fact that he kept Hillary out and by the good things he has been doing.

But anyone can make a mistake, and Donald supporters saying a tariff on Mexican imports is the same thing as Mexico paying for the wall is a huge factual error.

An American guy goes into a store and wants to buy some Mexican jumping beans.

“Why are they $1.20 today when yesterday they were only a dollar?”

“Because Mexico has to pay for the wall.”

“Wait a minute. I’m paying that extra 20 cents, not Mexico. So it’s me paying for the wall.”

Thus, a tariff on Mexican imports is obviously not “Mexico paying for the wall”.

But what about the other way around? What if we charge an extra twenty percent on everything we sell Mexico? Then for sure it’s the Mexicans paying for it, right?

No. Because the US govt is not able to reach into a Mexican’s pocket and collect money from him. So it’s the American exporter who will pay that 20%.

Devil’s Advocate: But Dave, the exporter will collect that straight from the Mexican pocket by charging the Mexican an extra 20%. So it is Mexico paying for the wall.

Smiling Dave: Well, yes, if the exporter can actually sell the same amount of stuff as before we taxed him. But there is a huge Wall standing in his way, called the

Laws of Supply and Demand. Everyone has felt this law in his everyday life. When video games cost $20 you will buy, say, five of them. When they cost $100, you will buy less than five.

DA: But Dave, even in your example, the money is the same. In each case, you buy $100 worth of stuff.

SD: Ahh, but the devil is in the details. If the exporter was selling 5 American video games at $20 each, his net income is $100, because he keeps all the profits. But if he sells one at $100, of which he keeps only $20, because there is an export tax of $80, his net income is $20. So that tax, even though the Mexicans are paying it, is making the American producer lose 80% of his income. He will go bankrupt. That’s not our goal. We are shooting ourselves in the foot.

DA: Dave, we aren’t going to charge an 80% tax, only a 20% tax.

SD: Do the math. The principle is the same. A higher price means less sales. But a higher price does not mean higher profits per item for the exporter, because any extra money goes to the US govt, not to him. Meaning you are decreasing his income.

DA: Meaning he is paying for the wall, and may well go bankrupt.

SD: You got it.

DA: So how will we make Mexicans pay for the wall?

SD: I don’t know. But one thing is absolutely certain, by simple arithmetic. Any tariff or tax on anything, whether we buy it from Mexico or sell it to Mexico, means we are paying for it, not them.

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2 Comments

  1. Guilherme says:

    Been a longtime fan of the blog, glad to see you and DA well and alive. Cheers!

    Like

  2. Smiling Dave says:

    Thank you for the kind words. Cheers.

    Like

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