On Thursday afternoon, President Donald Trump threw out an idea for financing his wall – a 20% tariff on Mexican imports to the United States.
He did, after all, promise that Mexico would pay for the wall while on the campaign trail.
The problem is, if he puts a 20% tariff on goods coming in from Mexico, the US will most certainly pay for it too. (The plan would also violate international trade law through the US’ membership in the World Trade Organization, and our trade pacts with Mexico, just to be clear.)
“Trump’s plans to finance his wall are going to hit the auto industry like a ton of bricks,” said Lee Branstetter, a professor of economics and public policy at Carnegie Mellon. “The consequences for American workers and American business would be immediate.”
The S&P 500 Auto Parts & Equipment index fell 2% on this news.
Mexico ships $ 50.5 billion in finished cars and $ 501 billion in car parts to the United States, according to the Center for Automotive Research. Over the last six years, US car manufacturers have invested $ 24 billion in Mexico’s auto industry.
But even before that, any disruption in the flow of goods between the US and Mexico was enough to bring Detroit to its knees.
The Peterson Institute of International Economics put a solid example of this in a recent report:
“The best analogy might be the situation immediately following September 11, when the United States closed the border with Mexico, severing supply chains and forcing the shutdown of automobile assembly plants in the United States within a week. Anguish in Detroit forced a reconsideration of the policy. The immediate reaction to the contemplated Trump policy package could be even more dramatic.”
Now, because trade treaties also impact tax policy, changing it is not 100% clearly up to the executive brance of the government. However, Trump could argue that the tariff is necessary in the face of a national emergency. It would take a minute before his claim was ultimately challenged in court.
“Conceivably a President Trump could instruct his officials to investigate the national security implications for the
US industrial heartland resulting from thousands of Chinese and Mexican imports,” said the Peterson Institute in its report. “Without exception, the courts defer to executive branch determinations of national security. Hence, following such an investigation, it is conceivable that President Trump could impose high tariffs on wide swaths of imported merchandise.”
Naturally that would also mean higher prices. But perhaps that is worth it to some Americans who are concerned about illegal immigration and drug trafficking.
That said, according to Branstetter: “One thing that Americans won’t have to worry about anymore if Trump implements the trading policies he wants to implement is a job.”
So… you know, fewer worries.
NOW WATCH: Harvard economist Rogoff explains why he is so optimistic about the economy under President Trump
