It is no secret that the scariest word in the English language is taxes. All throughout history taxes have been one of the most powerful and reactionary tools any government has at its disposal. They have also become one of the most hated things politicians have to talk about. Because regardless of faith, birthplace, or political upbringing nothing pisses more people off than raising taxes. And the fact remains that tariffs and taxes are the same thing. However I hold out in my belief that there is a time and place for taxes and with Donald Trump’s proposed 20% import tariff on Mexico we will see just how worthwhile my faith in taxes really is.
Now the interesting thing about the proposed tariff is that it really isn’t all that conservative of a trade deal. As many conservative pundits such as Ben Shapiro have pointed out, Trump’s isolationist economic policy is a big change from the open and wild emphasis on free trade and deregulation of previous conservative presidents such as Ronald Reagan and George Bush. This is why some traditional conservatives have called out his policies as backward and anti-free trade. Yet Trump seems steadfast in his wish to make Mexico pay for the wall in one way or another even if that may hurt American consumers in the short term. Yet for all the negative press associated with proposal there is a potential upside to the deal. However like many things in this Presidency even the upside is uncertain.
According to UC Berkeley Economist Professor Alan J. Auerbach there is very big potential with this trade deal. That is because of the valuation of the US dollar.
Now normally currency amounts for different countries fluctuate all of the time, however in countries with restricted trade agreements and bigger financial clout behind them the currency tends to stay “strong”. That is to say that the currency will be relatively more expensive in comparison to other currencies. For example one US dollar can get you about 166 Angolan Kwanza because the US economy is much bigger and healthier than Angola’s. However it is unwise to solely use currency exchange rates to determine the healthiness of an economy. In countries like China and Japan their currency is still inexpensive relative to the US dollar but their economies are still up to par with the US due to their high output of goods and economic productivity.
But this leads us into the interesting rabbit-hole of Trump’s proposal. According to the textbook version of macroeconomics the outcome of the tariff would go like this. The US taxes Mexican goods which means retailers selling those goods need to charge more for them and import less of them, the value of the US dollar goes up because of this, which in turn makes the value of imports cheaper. So essentially we go all the way back to square 1. This circular flow of imports and currency exchange rates is macroeconomics 101. The only question is how long will take the US dollar to go up in value before consumers stop feeling the burden of the border tax?
On that question hinges everything.
As NPR’s podcast Planet Money points out “The debate going on between economists across the country is, how long will it take for the economy to adjust? Days? Months? Years? Nobody knows.” ( NPR)
This could mean everything with regards to the border tax. If the economic adjustment is quick then Trump will actually have delivered a meaningful victory for the US economy. If the adjustment is slow then the millions of lower-middle class people who voted for him will be hit the hardest. Yet the biggest problem isn’t even the policy itself, its Trump.
According to economist Caroline Freund ” Donald Trump needs to say that this is akin to what all the other countries in the world are doing with the value-added taxes and that this border adjustment is standard and that economic theory shows it is not protection”. However she was keen to point out “From what we’ve seen so far ( of the Trump administration) I don’t expect this to go smoothly” (NPR).
So even when Trump has the potential to get his economic policy right there is one big thing standing in his way. Donald Trump’s ego.
Abbey Zahoroiko says
The first thing I have to say is, I am terrified for this upcoming tax season !!!
I can’t imagine any of Trump’s policies being good for the world, our country or otherwise. Mexico will never pay for a multi-million dollar project and that means the American tax payers have to. But unfortunately, the American public is probably too ignorant to understand the downfall of having to 1) pay for a wall 2) have a wall get built. Trump is always the biggest problem, unfortunate for the country. I have low-hopes toward this wall, I fear we may be so far in debt from having to pay for something so obscure that the economy will ultimately plummet (: