By John F. Di Leo -
One of the problems with the news is that it always requires some background information. Without context, it is difficult to tell what’s really going on.
It may be reported that Israel fired on an apartment building in Gaza; that sounds horrible until you learn that terrorists based in that apartment building had been shooting rockets into Israel for weeks, making such retaliation necessary.
Or it may be reported that the average worker in some town is paid 30% less than you are for doing the same job as you; it sounds like he’s being taken advantage of, until you learn that the cost of living where he works is 30% lower than where you are.
Context is particularly challenging in the world of international trade, since – even though we all participate in trade in some way, as manufacturers, resellers, or consumers – it’s not taught at all in school, and necessary background is never mentioned in news stories that involve it.
The news of the day is that the Trump administration, having had enough of the border jumping going on along our border with Mexico, has decided to retaliate: we may soon see a 5% import tax assessed on all imports from Mexico. And that rate may rise monthly – to ten, then to fifteen, then to twenty, and finally to twenty-five percent in October – in an effort to convince the Mexican government to help us in our efforts to curtail illegal immigration.
Will it work? It might. It’s certainly the kind of economic disruption that ought to get a government to act, though in which direction is difficult to predict.
The natural view for a laissez-faire conservative is to reflexively oppose all taxes, and to remember that taxes are paid by the buyer, not by the seller. So in fact, taxes on imports from Mexico are taxes on Americans, not on Mexicans.
But another important rule of economics is that when you tax something, you get less of it… and if we Americans start importing less from Mexico because of a tariff, then the manufacturers of Mexico, particularly the thousands of maquiladoras up and down the border, just might rise up and demand that their government change policy.
It is well known, after all, that Mexico views the United States as a relief valve; they encourage their surplus population to move north, whether legally or not. The Trump administration has been trying without success to get Mexico City to help us in our effort to close the border; this new 5% tax is just another element in that long effort.
Import taxes
Before we can fairly evaluate this proposed change, we need to be aware of the status quo. Are there taxes on imports already, or not? What does this five to twenty-five percent tax represent, in terms of difference from the way it has been until now?
Well… when people import goods from foreign countries, those goods are generally subject to both duties and taxes in the importing country. It’s no different here, in the NAFTA area.
When members of NAFTA (that’s the USA, Canada, and Mexico) import goods from each other, those goods must naturally go through Customs at time of importation, just like goods imported from anywhere else.
Now, NAFTA is a free trade agreement, meaning that qualifying goods – not all goods, mind you, but qualifying goods (meaning goods that were manufactured here in the NAFTA region with substantially local/NAFTA labor and materials) – will be duty-free upon importation.
So, for the most part, qualifying NAFTA products are free of the normal duties, which tend to range from zero to twenty percent, depending on the product, but the vast majority are around five percent or so nowadays.
So NAFTA gets you a break on that five percent or so in tariffs.
NAFTA does not, however, get you out of the other taxes. Other taxes still apply, if any.
Canada charges an array of national and provincial taxes called GST, PST, and HST (depending on the province) on almost all imported goods, in addition to import duties.
So, most imports into Canada are hit with another 15 to 20 percent.
Mexico charges a mostly flat VAT on all imports, which is usually about 16%… again, in addition to the regular import duties.
By contrast, the United States charge some I.R. taxes on alcohol imports, but on very little else. For the most part, the USA just doesn't tax imports. We assess duties, and nothing else.
So if imported goods are duty-free – either because of NAFTA or because the commodities naturally carry a zero percent duty rate (as many do) – then the goods are completely tax-free into the USA.
In short… while we have been conditioned to believe that NAFTA is a free trade area, in which goods move among the countries tax-free, that has never really been the case. Even though NAFTA makes many imports among the members duty-free, it has never made them completely tax-free. It has never been a level playing field.
And one could argue, if one wanted to, that all these free trade agreements are somewhat deceptive for that reason. The USA has a constitutional ban on taxing exports, and we have chosen to only assess tariffs on imports but exempt imports from most other taxes. Even in states that assess sales taxes (like the 10% sales tax in Cook County, Illinois), the importation of goods into those states is exempt.
Let’s think about this a moment. Our exports are taxed at fifteen to twenty percent into Canada and Mexico, but their goods are not taxed when imported into the USA. Even during the 25 years of NAFTA.
Is that fair?
Has it ever been fair?
Now back to today's news. Some are livid that President Trump is planning on imposing a 5% import tax on all goods (not just NAFTA goods, but all goods) from Mexico.
A case can be made that such a step is necessary to place the kind of pressure needed onto the Mexican economy, to get their government to halt its active encouragement of illegal emigration into the USA.
And a case can also be made that such a step punishes the American importer more directly than it punishes the Mexican exporter, because it is after all the American importer who pays that bill.
Both may be true.
It’s a difficult choice.
But illegal immigration is wreaking havoc on the United States – on our culture, our education system, our economy, our neighborhoods. Illegal immigration is bankrupting big cities like Chicago… it’s filling our prisons and our hospitals with the victims of immigrant gangs’ drug trade… the financial challenges of our healthcare system can be almost directly laid at illegal immigration's feet. And illegal immigration is displacing Americans (of all ethnicities) from entry level jobs and from even more skilled trades.
Americans are suffering… and greatly curtailing illegal immigration is our only way out of many of our nation’s problems.
Is a 5% tax on imports from Mexico the best way to get there?
Perhaps. Perhaps not. But nothing else has worked thus far, and a case can be made that this method is worth trying.
And however effective or ineffective this effort may be, it’s fair to say that we ought to understand its impact before we judge the choice.
Economically, all this tax would really do is to bring us up to some degree of tax parity on imports. That may or may not be a desirable goal, but it’s a far cry from the spin that some have presented, the false assumption that we would wind up taxing their goods a lot more than they tax ours.
In truth, Mexico has been charging between fourteen and seventeen percent tax on imports of NAFTA-qualifying US goods for the full 25 years that NAFTA has been in place.
And we never reciprocated.
Until … maybe… just now.
Copyright 2019 John F. Di Leo
John F. Di Leo is a Chicagoland based international trade compliance trainer and transportation professional. His columns are regularly found here in Illinois Review.
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