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Trump's Mexican gambit

Instrumental to Donald Trump's presidential campaign was constructing a wall between the US and Mexico. Now that he is President, Matt Freathy discusses just how such a wall could be funded and specifically who will pay for it.

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Since the start of his successful campaign to be elected President of the United States, Donald Trump has pledged to build a wall across the USA-Mexico border and have Mexico pay for it, a cornerstone of his controversial platform. He has now disclosed how he intends to accomplish this against the insistence of his Mexican counterpart, Enrique Pena Nieto, that Mexico will not fund the construction of the wall. He has proposed imposing tariffs of up to 20 per cent on imports to the USA from Mexico and spending the extra revenue on the wall. Such a move would tear apart the North American Free Trade Agreement (NAFTA) and would provoke Mexico into introducing levies of their own on American exports headed south of the border, essentially starting a trade war between two countries whose economies depend heavily on one another.

A major flaw in Trump's plan lies in the unshakeable fact that if such punitive tariffs were to be introduced, it would not be Mexico who pays for the wall, but the American consumer of Mexican products. Mexico-based companies will not simply absorb such a sizeable increase in their costs of plying their wares in the USA. They will raise their prices in America accordingly to minimise their losses, and thus the wall will be funded by the Americans who spent $316.4 billion on Mexican imports in 2015. Every American shopper who pays 20 cents more for an avocado will be contributing more to the wall than Mexican businesses or taxpayers.

Therefore, no, Mexico will not directly fund the wall under Trump's plan. But they will pay, and pay dearly. Exports to the United States make up a gargantuan 73 per cent of Mexico's total exports, the volume of which has increased by 638 per cent since NAFTA massively liberalised trade between the two nations, along with Canada, in 1993. Increased prices of imports to the USA from Mexico because of these new tariffs would reduce demand for Mexican goods and services as Americans switch to cheaper alternatives produced in countries yet to incur the wrath of Trump in crucial and highly price-sensitive industries like cars and computers. Mexico's economy is so dependent on trade with its powerhouse neighbour that any significant slump in exports would almost certainly cause the country to fall into a deep recession, severely damaging living standards and employment. Ironically this economic sucker punch could increase immigration from Mexico to the United States as Mexicans flee north in search of work as the relative prosperity of the USA increases, bringing the opposite result from the wall's intended purpose.

It is true that Mexico relies far more on the United States than vice versa, however the American economy will be far from unaffected by a worsening of their trading relationship. In 2014 the US Chamber of Commerce estimated that 1.1 million American jobs are supported by exports to Mexico. Per an estimate given by Republican Senate Majority Leader Mitch McConnell the wall will cost $12-$15 billion, equivalent to less than 5 per cent of one year of American imports from Mexico. It's clear that a 20 per cent tariff would be unnecessarily high, so even if it did damage trade, it would still quickly raise well beyond the required amount, and while this would cause suffering on both sides Trump knows Mexico's pain would be far greater. This suggests that his intention is to bully Mexico into compliance under threat of economic depression.

Against a uniquely USA-reliant Mexico he may be successful, however these strong-arm tactics are a high-stakes game and if Trump thinks they would be effective in any future stand-off with China, his other main scapegoat for the decline in American manufacturing, then he is dangerously overestimating America's economic clout and will be in for a very rude awakening. Sad!

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