President Trump capped off a dizzying first week in office by signing an executive order directing the construction of a border wall with Mexico. And, on Thursday, his administration sought to address the two biggest questions plaguing the project: Who is going to pay for it and how?
Sean Spicer, the White House press secretary, seemed to suggest—at least temporarily—that the United States would impose a 20 percent tariff on all imports from Mexico to generate revenue for the wall. Or perhaps he didn’t—his wording was unclear, and many people thought he was describing what’s known as a border adjustment tax, and not a tariff at all. After considerable controversy quickly ensued, Spicer walked the plan back an hour later, offering that a tariff was only one possibility. “It could be a multitude of things. Right? It could be, instead of 20 percent it could be 18 it could be 5,” Spicer told reporters. “We could go in another direction, we could talk about tariffs, we could talk about, you know, other, custom-user fees, or a hundred other things.”
With an executive order now set, the question of how the multi-billion-dollar project would be funded persists. To get a sense of how a tariff (or a border adjustment) would work and who would ultimately pay for it, I spoke with Douglas Irwin, an economist at Dartmouth University, who writes extensively on U.S. trade. The interview below has been lightly edited for clarity.
Adam Chandler: In the last 24 hours, the Trump administration seemed to propose and then un-propose a 20 percent tariff on Mexican imports. If the United States did decide to impose such a tariff, how would that happen?
Douglas Irwin: The first question is does the president have authority to do such a thing? And it’s not clear the president does. Under the Trade Act of 1974, the president is allowed to impose 15 percent tariff for balance-of-payments purposes and only for 150 days. And after that it would need Congress’ approval.
Chandler: Are any there exceptions to that rule?
Irwin: If we’re talking about across-the-board tariffs for all imports or all imports from a particular country, there’s basically that provision, otherwise the president is going to have to invoke national security. This administration might do that, but that’s an extreme step. To say that there is a national security or national emergency that requires those tariffs.
There is a question out there about whether the president can unilaterally do this. I tend to think most of the statements coming from the White House are related to the border tax adjustment. And there’s been a lot of confusion about that. If implemented correctly through Congressional legislation, [a border tax adjustment] basically becomes a sales tax. Any product sold in the United States is subject to that tax whether it’s produced domestically or overseas. That’s the way a lot of other countries do it and that’s a fairly normal practice.
Chandler: So who will end up paying for any of this?
Irwin: It will mainly be on consumers. Consumers will pay the higher price and I think that’s ultimately where most of the taxes are going to come from. You know, there’s an old saying: Most cities in the United States have a dog tax. Does that mean dogs pay the tax? No, the owners of the dogs pay the tax.
So you tax companies. Are you really taxing companies? No, the incidences are going to be on the owners of the companies or the consumers who buy from those companies. Tax incidence is a tricky thing to assess.
Chandler: Mexico is America’s third-largest goods trading partner and our fourth-largest supplier of oil. Which goods would be most affected by a tariff? What would the biggest consequences be if somehow it got enacted?
Irwin: Well, the biggest consequence will be for the supply chains of the manufactures that go across the U.S.-Mexico border, particularly the automobile industry. What they rely on is the fact that there is basically free trade and so they’re just paying the transportation costs, and can move certain parts of the production process either north or south of the border. But if you impose a tariff on that, then it makes it not economical to do that. And, as a result, companies wind up locating production either in Mexico or the United States, but you don’t get this production sharing that’s a big part of what the auto industry does.
Chandler: Just a few weeks ago, President Trump said he opposed border adjustments and went against decades of policy by suggesting that the U.S. dollar is too strong. With recent developments in mind, do you have a sense that the president has a longview here with regard to trade? Is there a narrative that makes sense to you or is it just haphazard?
Irwin: Well, I think the problem is they keep saying they want to get a better deal and these are tariff threats to get a better deal, a better NAFTA, or what have you. And I don’t think there’s a clear identification of what constitutes a better deal. The number they always point to is the fact that we have a trade deficit with Mexico. But trade agreements don’t guarantee particular outcomes. So just because you have a trade agreement doesn’t mean that there’s going to be a trade surplus or trade deficit. It doesn’t govern that.
When we have a sales tax on something, that doesn’t determine whether people buy a lot of it or a little, that’s just part of the price. It’s up to people to decide for themselves whether they want to buy something or not. It’s the same when we have free trade or when we have high tariffs; what’s determining the trade deficit is something else. It’s really determined by financial flows between countries, which way capital is moving. And that’s independent of the trade agreement.
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