Trump just proposed a $60 billion tax hike
This is where it gets dicey.
While president-elect and now president, Donald Trump has threatened new “border taxes” on products from Mexico and China if other reforms don’t take place. Now he seems to be proposing a specific tax on imports from Mexico, to pay for the wall he wants to build along the Mexican border, which could cost between $10 billion and $30 billion. Trump says he wants Mexico to pay for the wall, but such a border tax would fall largely on American consumers and US companies. And it could hurt the overall US economy rather than helping.
White House spokesman Sean Spicer told reporters on Thursday that a plan “taking shape” would put a 20% tariff on Mexican goods imported to the United States. There are no such taxes now, since both countries are part of the North American Free Trade Agreement, which eliminates tariffs. A new 20% tax would raise the cost of a $100 product to $120. The importer could bear some or all of the added cost, by keeping the price at $100 and paying the tax in full. But sellers always try to pass new costs onto consumers, and some or much of the cost increase would probably come from consumers’ wallets.
Trump’s threat of tariffs are the part of his economic plan business leaders and economists hate the most. Trump’s goal is to make imports more expensive in order to spur more production in the United States, where costs are almost always higher than in other countries because workers get paid more. But many economists say tariffs are a misguided way to encourage more US manufacturing, and could end up doing more harm than good. The Smoot-Hawley tariffs in the early 1930s are a notorious example of a horrible economic policy that triggered damaging trade wars and made the Great Depression worse, not better.
Trump can’t impose new tariffs on Mexico right away. He’d first have to officially inform Canada and Mexico of America’s intent to withdraw from NAFTA. If nothing changed, the United States would exit the treaty six months later. At that point, Trump could begin imposing tariffs—largely without any new legislation from Congress. Spicer indicated new tariffs might be part of a big tax-reform bill expected from Congress this year, but trade experts say Trump wouldn’t need a new law. He could largely impose tariffs on his own.
[Related: How Trump can get his way on tariffs.]
Whether that would be smart is another question. There is bound to be aggressive pushback to the whole idea from many industries, plus Republican members of Congress and even some of Trump’s incoming Cabinet members, who favor free trade and oppose tariffs. Trump’s negotiating style, as many are learning, is to threaten draconian consequences then settle for some compromise that’s less disruptive. On the other hand, the mere threat of tariffs might put business plans on hold at dozens of big companies, spook financial markets and wreak havoc with the value of the dollar and commodities dependent on future expectations of inflation.