Throughout Trump’s campaign he repeatedly promised that “we” would build a wall and that Mexico would pay for it. The details of that boast were conveniently omitted. But class is now in session and the homework is due, so at long last we have been made privy to his “secret” method of getting Mexico to pay for this wall: tariffs. Trump plans on imposing a 20% tariff on imported Mexican goods coming into the US. The proceeds are earmarked for paying for said wall. There’s just one problem with this little scheme of course: it won’t work, or at least not the way Trump imagines. In other words, as with all government actions, there will be unintended consequences. One of the central tenants of economics is that incentives matter. Closing a door just means now the window doesn’t look so bad. Like rats from a sinking ship, there are numerous routes to avoid the tariff. To offset the tariff Mexican exporters may raise prices, which of course means US buyers will shoulder the cost (although magically increases in minimum wage never incline one to increase prices). But higher prices mean US buyers may then opt to forego the purchase or to seek alternative goods; the net effect being no tariff earned and decreased sales for the Mexican company employing, you know, Mexicans (homework assignment: what effect might increased Mexican unemployment have on the demand to enter the US looking for work?). Or if the Mexican company decides to absorb the cost then that means they’ll either have to cut costs by potentially scaling back their work force or slowing the rate of hiring – all of which puts more Mexicans out of work (again see homework assignment above). The more you turn up your stereo to drown out your neighbor’s music, the more he does likewise in a perpetual game of one-upmanship until you both go deaf.
The immigration “problem” is one of positive feedback. Actions designed to decrease an effect actually make it grow. The irony here is that Trump of all people doesn’t see the problem. He is quite fond of blaming China for harming the US economy and putting people out of work by flooding the US market with cheap goods. However, he fails to see the US has been doing the exact same thing to Latin America for decades. That area of the world is less developed and so depends much more on agriculture production to support its economy. Any factors (such as cheap imports) in that agricultural market will have an outsize effect in that region. The US has a long history (since the depression) of agriculture subsidies to US farmers. Subsidies lower the cost of US agricultural products, allowing US farmer to export heavily into the Latin American market where local farmers can’t compete. That darn NAFTA! Yes, NAFTA enabled cheap imports in both directions. These imports had the obvious effect of putting them out of work whereupon they are left with little choice but to move to where there is a demand for low skilled labor – the US.
The inconvenient truth is that the solution to most of the immigration “problem” is to simply end all agricultural subsidies. But no, we’d rather scratch our heads as to why so many keep coming here, shrug our shoulders, and then set about building a wall to keep “them” out. Farm subsidies have become such a political lighting rod in this country that it is actually easier to subsidize foreign farmers (the US sends subsidies to Brazilian cotton farmers!) than to scale back subsidies to our own farmers.
If Trump really wants to stem the tide of Mexicans entering the US he needs to make Mexico great again – great enough that their economy becomes a magnet to all expatriates, drawing them home to where the jobs are. Perhaps Carrier should build that Mexican plant after all.