What Will a 20% Tariff Do?

The Trump administration is now talking about a 20% tariff on imported goods from Mexico. As expected with any issue in economics, reactions are all over the map. Predictably, his supporters forget everything they learned about economics. They think the tax will be yuge.

Many others oppose the tax, but make a basic economic error. They think a 20% tax on, say Corona beer, will result in a 20% increase in the price of Corona.It’s much worse than that. Stop and think about it for a moment.

A 6-pack of Corona is about $10. Will people pay $12 for it? I bet most won’t. Corona itself has the strongest motivation to find out what consumers are willing to pay. If they thought they could charge more, they would already have raised their price.

Therefore, this tax will eat up Corona’s capital, as the company squeezes its profit margin. Maybe they raise the price a bit, and suffer reduced volumes. This will pinch margins even more, as there are fixed costs which don’t go down as volume drops.

Their American importers will also suffer, of course.

Ultimately, Corona will likely be forced out of the market. That’s when beer prices will go up, with fewer producers and less supply.

And of course the newly unemployed Mexicans who worked at Corona will cease buying any products from America. And Corona itself will have to reduce what it buys, as it is making less money.

Domestic beer brewers +1
Domestic importers -1
Domestic consumers -1
Domestic manufacturers -1
Domestic exporters -1

And all of this is assuming Mexico does not respond with tariffs and regulations of its own, which will add more entries to the minus column. If only we had a historical precedent so we could know how that is likely to play out…

7 thoughts on “What Will a 20% Tariff Do?

      1. farkasdani

        I’m just getting familiar with your work. So far the definiton for deflation – at least what I accepted was: Contraction of fiduciary media (or counterfeit credit).

        I just watched your lectures available on your youtube channel, and I am in the progress reading trough your blog. It’s absolutely incredible work! I share a very similar (sad) view of our capital consuming wolrd economy and global society.

        I’m an amature apprentice of the austrian school (I’m a programmer). I read Mises, Rothbard etc. tough I think some of your explanations are better and clearer.

        Definitely gonna be the follower of your work from now.

        Cheers from the fascistic little “kingdom” of Hungary!

  1. dnarby

    You forgot:
    Domestic beer equipment producers +1
    Domestic grain producers +1
    Domestic beer producer workers producers +1
    Knock-on effects from more domestic employment +1

    And there’s plenty of beer producers here, so prices domestically won’t change. Corona isn’t so cheap relative to quality that there are poor substitutions.

    The wealth of a nation is in it’s productive capacity of it’s people. So the best case scenario is a strong currency, and strong manufacturing. We have half that presently.

    Despite this, I don’t hold restricting trade as the most effective means to increase prosperity (at best it’s marginal). As the Mises Institute has pointed out, it’s low corruption http://www.zerohedge.com/news/2016-11-05/protectionism-vs-corruption-which-worse-economy

    Reply
    1. Keith Weiner Post author

      The domestic beer equipment producers lose the business of the Corona brewery. So at best it’s a wash.

      Grain is a worldwide market. Taking a little bit of beer volume out of the market will soften demand for barley. The response of price to a change in volume can sometimes be highly non linear.

      You say “Corona isn’t so cheap relative to quality…” It does not work that way. Think of change at the margin.

      History bears out my view. Smoot-Hawley was widely promoted on grounds similar to what you claim above. The actual result was the opposite of what the promoters predicted (economists at the time knew what would happen).

      Reply
  2. dnarby

    Yes grain is a worldwide market, but in this case it’s paid for directly in dollars (instead of dollars exchanged for pesos), so the bid on the dollar increases, while it declines on the peso.

    I don’t understand your argument about restriction on Corona creating change at the margin. Beer isn’t like gasoline or diesel, you can easily substitute one beer for another, so change would be brief and negligible. Motor fuels, not so much. But

    Domestic beer equipment producers lose Mexican business (if they ever had it), but gain in the USA, so that is a wash. But the installation and maintenance jobs stay in the USA, with resultant knock on effects.

    Regardless, I see the Mises paper as correct. Trade is loosely correlated with GDP, so all of this is moot. But the flip side of that paper is restricting trade can have little or somewhat positive effect as well. So free trade can be good, bad or indifferent. Low corruption is much more significant.

    What I believe Trump is trying to achieve is to counterbalance the effect of corrupt government (not enforcing immigration laws, among other things) using trade policy. While it would be preferable to strike the root, it’s quicker and easier to impose tariffs than root out corruption, so hopefully this is just a start (and more than just an easy ‘win’ for optics sake).

    Reply

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