Contradictory statements from the administration Thursday left many wondering how President Donald Trump plans to pay for a wall along the country’s southern border.
White House press secretary Sean Spicer floated the idea of using a 20 percent tariff on goods imported from Mexico to pay for a wall, saying the administration would use “comprehensive tax reform as a means to tax imports (at 20 percent). ...”
A few hours later, Spicer clarified the comment to say he was referring to a plan Speaker of the House Paul Ryan, (R-Wisc.), has said he supports. The plan is called a border adjustment tax (BAT). The BAT is different from a tariff and is just one of a “buffet of options” that the administration could use to try to force Mexico to in some way fund the wall, Spicer said.
Whether it's a BAT or a tariff, the president's promise of a wall paid for by Mexico is not something Mexico's President Enrique Peña Nieto says he is willing to entertain. Pena Nieto canceled a planned trip to Washington to talk with Trump about relations between the two countries and talk of a trade war caused the peso to take a dive and gains in the U.S. stock market to slow down.
What is a trade war and what would it mean if the United States and Mexico engage in one? Here’s what could happen.
What is a trade war?
A trade war happens when one country places a tax or duty on products imported from another country, then the other country retaliates by placing tariffs on the first country’s products. For instance, the United States could place a tariff (an extra tax) on car parts made in Mexico that are sold in the United States. Mexico, in turn, could place a tariff on corn that the United States exports to Mexico.
Mexico's economy minister said last week that Mexico would respond immediately to any tariffs Trump imposes on Mexico with tariffs on American products. That is how the "war" would start.
What would happen if there was a trade war between the United States and Mexico?
Under the North American Free Trade Agreement, of which the U.S. and Mexico are participants, goods and services are free from tariffs. If a trade war starts between the two countries you could see tariffs on cars, car parts, food, farm goods and other products imported into the United States. Automakers in America would likely take the biggest hit – several American companies have production facilities in Mexico.
As far as the effect on workers in the United States, according to the Woodrow Wilson International Center for Scholars, around 5 million American jobs depend on trade with Mexico.
What is the Trump administration suggesting – a border tax or a tariff?
It’s not clear. On Thursday, the initial suggestion was that the wall could be funded through a 20 percent tax on imports from Mexico – a tariff. Later, Spicer said that the border adjustment tax could be an “option.”
What is the difference between a border tax and a tariff?
While a tariff is a tax or duty that is charged on certain items imported into the United States, a BAT is a tax levied on goods based on where they are sold. Goods that American companies sell abroad would be exempt from a BAT tax; goods imported for sale in the United States would be subject to the tax.
A border tax would require Congressional approval.
Can President Trump issue a tariff on his own?
A president can levy a tariff in a couple of ways. Under the Trading with the Enemy Act of 1917, the president can restrict trade during “time of war.” According to the act, being “at war” doesn’t mean you have to be at war with a trading partner, just at war somewhere in the world.
A president can also use the International Emergency Economic Powers Act of 1977 to levy a tariff. The definition of what constitutes a national emergency is fairly loose. Loss of jobs can be considered a national emergency, a CNN story explains.
What does the United States import from Mexico? What could be taxed?
According to the Office of the US. Trade Representative:
- Mexico was the United States' third largest supplier of goods imports in 2015.
- The top import categories in 2015 were: vehicles ($74 billion), electrical machinery ($63 billion), machinery ($49 billion), mineral fuels ($14 billion) and optical and medical instruments ($12 billion).
- U.S. imports of agricultural products from Mexico totaled $21 billion in 2015, the US's second largest supplier of agricultural imports. Leading categories include: fresh vegetables ($4.8 billion), other fresh fruit ($4.3 billion), wine and beer ($2.7 billion), snack foods ($1.7 billion) and processed fruit and vegetables ($1.4 billion).
What could it cost American consumers?
If prices of Mexican imports are taxed, U.S. consumers could be paying more on items such as vehicles, food, wine, beer, machinery and other products. It would depend on which items were taxed.
