One of the election promises of Mr. Trump was to build a wall on the Mexican borders to help fending off illegal immigration. In 2012, a number of illegal immigrants residing in U.S. approached 12 million, 52 % of them was born in Mexico. This was a huge concern for many of U.S.’s conservatives who related this kind of immigration with high crime rates, gangs’spread, low illegal wages in several industries, increased spending on border guards and the justice system.
”We Will Build The Wall And Mexico Will Pay For It.” President Donald Trump
Many of Mr. Trump supporters, at the beginning of his presidential campaign, were very excited for the idea of a wall border. However, Mr. Trump threw another huge promise by forcing the Mexicans to build that wall using their own tax money instead of the Americans’ money!
There were no speculations about how this could be accomplished till Mr. Trump suggested in January 2017 to impose a 20 % border adjustment tax where all the U.S. imports from Mexico would be subject to that tax, and then it may extend to every country having a trade surplus with the United States.
However, imposing this tax will eventually increase the prices of the Mexican goods, and at the end, the American buyer (citizen) will indirectly pay for the wall out of his pocket.
So, how could the border tax work in the light of the above consequences?
At first, we should talk about the Mexican economy’s exports and imports to and from the United States and their huge impact on Mexico. In 2015, Mexico had a total GDP of $1143 billion compared to $1298 billion in 2014. Mexico exports several types of goods to U.S. as vehicles, electric machinery, mineral fuels, optical and medical instruments, agricultural products, wine and beer, snack foods, in addition to the service sector that includes travel, transportation and other technical services. Mexico imported nearly the same manufacturing goods, in addition to plastics but with different in-process state, meaning that, high tech components and semi-finished products were made in US and then assembled in Mexico. Other agricultural and food were also imported by Mexico like corn, soybeans, dairy products, beef, and pork.
The most recent trade deficit U.S. has with Mexico is in the range of $58 billion. Closing that trade deficit was the main logic of the Trump’s administration behind imposing that tax with its southern neighbor. Nevertheless, the actual principle on how the tax would work should not be the “direct” funding but the “indirect” economic pressure on the Mexican authorities!
In other words, it would be similar to a “sanction” rather than a pure “revenue” stream.
To discuss it further, we should clarify that Mexico is already suffering from noticeable increase in core inflation, interest rates, and a trend of currency devaluation coupled with a dwindling federal reserve. The Mexican pesos is very sensitive to U.S. politics; it was rapidly devaluated by 13 % just upon the election of Mr. Trump to the office.
By imposing that tax, the Mexican products suddenly will become very noncompetitive with other markets. The American buyer will, ultimately, abandon them. And since the imports of United Stated from Mexico are about 80% of the total Mexican exports, the Mexican economy will face a bad combination of existing inflation and an induced recession from the border tax, and hence a reduced and shrinking economy. A shrinking economy will lead to stumbling businesses and increased unemployment rates. That is a sure recipe for a stagflation, which is the worst enemy of any economy.
As a result, the Mexican authorities will experience mounting pressures from all the above economical hurdles leading to civil unrest and an inevitable chaos. In fact, on January 5, 2017, numerous deadly riots erupted in response to a 20% fuel price hike by the Mexican government. That gives an indication about the delicacy of the Mexican economy.
“Mexico does not believe in walls.” President of Mexico Enrique Pena Nieto
Mr. Enrique Peña Nieto, the president of Mexico, in several occasions, admitted strongly that Mexico will never pay for the wall. However, it appears that he underestimated the leverage of the United States. The Americans can tolerate the decrease of their total exports by 15%, but he, and Mexico, cannot endure the loss of 80% exports to the U.S. Leaving a big burden to his successor, Mr. Nieto may play politics, and show a hardliner attitude against funding the wall. But that stunt would only destabilize Mexico.