As we all know by now, Mexico and the US cut a deal last Friday.
Under the deal, in which Mexico agreed to take “unprecedented steps”, the tariffs that were due to come into effect on Monday have been suspended.
“Mexico will try very hard, and if they do that, this will be a very successful agreement,” said President Trump.
There were fears that the tariffs could hurt US businesses and consumers.
Under President Trump’s proposal, duties would have risen by 5% every month on goods including cars, beer, tequila, fruit and vegetables until they hit 25% in October.
I don’t know why people are surprised by this.
Before he even took office, President Elect Donald Trump had given hints as to how he would get America working again.
One of those hints was that if Ford wants to build cars in Mexico, that is fine, but he will slap a $3000 tax on them when they enter the country.
Another word for tax on imports is tariffs.
So President Trump used the threat of tariffs to bring Mexico to the bargaining table.
The deal was reached at the end of three days of negotiations which saw Washington demand a crackdown on Central American migrants.
What do we know about the deal?
In a joint declaration released by the US state department, the two countries said Mexico would take “unprecedented steps” to curb irregular migration and human trafficking.
But it seems the US did not get one of its reported key demands, which would have required Mexico to take in asylum seekers heading for the US and process their claims on its own soil.
Under the deal, Mexico agreed to:
Deploy its National Guard throughout the country starting Monday, pledging up to 6,000 additional troops along Mexico’s southern border with Guatemala
Take “decisive action” to tackle human smuggling networks
The US agreed to:
Expand its program of sending asylum seekers back to Mexico while they await reviews of their claims. In return, the US will “work to accelerate” the judicial process
Both countries pledged to “strengthen bilateral co-operation” over border security, including “coordinated actions” and information sharing.
The declaration added that discussions would continue, and final terms would be accepted and announced within 90 days.
Should Mexico’s actions “not have the expected results”, the agreement warned that additional measures could be taken but did not specify what these would be.
So let’s talk a little history when it comes to tariffs imposed by the US.
The new American tariffs emerging on foreign products, on Mexican, Chinese, and soon European goods as the administration indicated last week, may well serve their stated purpose.
This is to convince those countries that currently have trade barriers against American goods to take them down.
If this comes to pass, the cause of free trade will have been served.
However, at the moment what we have is a slew of new trade barriers on foreign goods offered for sale here.
One of the reasons we have gotten to this point has little to do with the hope of leveraging down foreign countries’ trade duties.
It is that there is a general sense, among the American public, that previously in history, when the American economy really grew at great rates in the period of time before the era of free-trade ideology after 1945, we had tariffs.
When the country was founded 95% of the budget for the federal government came from tariffs.
In July, 1909 Congress passed the 16th amendment which created the Federal income tax eliminating the need for tariffs to fund the government.
So the burden of funding the federal government shifted from imports on foreign goods, to the US taxpayer.
Today 70% of imports have no tariffs and tariff rates on the rest of the products are only 1 or 2%.
As such tariffs only bring in 2% of the federal budget.
Alexander Hamilton, was the main supporter of import restrictions.
Although Congress adopted the first tariff in 1789, its principal purpose was to raise revenue. Rates went from 5 percent to 15 percent, with an average of about 8.5 percent.
However, in 1816 Congress adopted a specific protectionist tariff, with a 25 percent rate on most textiles and rates as high as 30 percent on various manufactured goods.
In 1824, protection was extended to goods manufactured from wool, iron, hemp, lead, and glass. Tariff rates on other products were raised as well.
That first wave of protectionism peaked in 1828 when the average tariff rates rose to nearly 49 percent.
As early as 1832 Congress began to scale back tariffs with further reductions enacted the following year. In 1842, tariffs were again raised; but by 1846 they were moving downward, and further lowered in 1857. Following the 1857 act, tariffs averaged 20 percent.
Tariffs and American prosperity went together. Why not try to get that mix again?
It is a fact, in the period in which the tariff was the dominant form of taxation, the United States did great, better probably than it ever has. This country’s economy regularly grew at rates double ours today, when the tariff was in force from 1789 until early in the 20th century.
However, there was a condition in these years that is absent today. That condition is that the tariff was the only form of federal taxation.
There was no income or profits tax, no wage tax, no tax on investment gains—none of the things we see in our tax code today.
In fact, for one long stretch, from 1817 to 1861, the tariff was the only form of federal taxation. In the other periods prior to 1913 (when the income tax was enacted), the tariff was accompanied by a small list of sales taxes, mainly on alcohol.
When the American economy really boomed under the tariff, over the first half of our history, financiers and entrepreneurs plowed money, energy, and ideas into businesses knowing that the government would assure US businesses would recover costs and make a profit.
The sum an investor made from a business success was not taxed as a capital gain, like today.
A company’s pay rates did not have to exceed the wage needs of the employees so as to cover their income and payroll tax obligations, like today.
The money left to a company from sales after costs faced no corporate tax. And there was no inheritance tax.
In these circumstances, it was natural for entrepreneurs to move, investment to flow, jobs to proliferate, savings and standards of living to grow, businesses to succeed, and families to flourish.
When the tariff existed exclusive of essentially all other forms of taxation, the space for American enterprise to explore was huge.
The tariff supervised good old American prosperity—and no other form of taxation did along with it.
Interestingly, the extensive debates over tariff in the 19th century often focused on its effects on domestic businesses. In two ways, the tariff raised costs on domestic businesses.
The one way (as we are seeing today) is that it raised the cost of imported goods used in the processes of production.
These costs had to be added the final price of products made in the US.
The other way concerned domestic wage rates. Companies in every industry had to pay higher wages because the tariff raised the overall cost of living. Otherwise the supply of labor would not meet demand.
This country rarely saw any other form of taxation in the era of the tariff.
Before the tariffs currently coming on line succeed their desired result of eliminating world trade barriers, it would be nice if they had one other highly traditional effect: a steep reduction in domestic tax rates of all varieties.
Think about that. How many times in recent weeks have we heard that we are now collecting billions of dollars in tariffs?
That is money we didn’t have coming in prior to the Trump administration.
It only makes sense that if we are making foriegn countries pay our government billions in tariffs, the should be the opportunity to take the burden off of the US taxpayer and let the foriegn countries pick up the tab for running the federal government.
That is how we used to do it and I think that is where President Trump is headed with his new economic policies.
So with that history in mind, I think you can see, the tariff can be a very powerful tool.
So let’s go back to the recent Mexican deal.
Mexican Foreign Secretary Marcelo Ebrard told journalists: “I think it was a fair balance, because they have more drastic measures and proposals at the start, and we have reached some middle point.”
Speaking at a separate news conference, US Treasury Secretary Steven Mnuchin said “we couldn’t be more pleased with the agreement”.
It’s still unclear whether it was internal pressure within his party or the measures being offered by Mexico that dissuaded President Trump from implementing the plan, or perhaps simply an appreciation of its potential consequences. President Trump knows his history folks.
It became apparent during the talks just how intertwined the two neighboring economies are, and many argued that a 5% tax on all Mexican goods would hurt US suppliers and customers too.
Furthermore, damaging the already fragile Mexican economy could have pushed it into a full recession and created more migrants heading north in search of work.
Still, some considered the meetings were useful, in part to recognize that both nations are facing a steep rise in undocumented immigration.
The plan to deploy military personnel to Mexico’s southern border may well have helped bring this dispute to an end.
However, President Trump has now tied immigration to trade and could easily do so again in the future should the situation fail to improve.
Again, the tariff is a very powerful tool.
So what is the reaction in Mexico?
Mexico is currently one of the largest trading partners of the US, just behind China and Canada – two countries also locked in trade disputes with the US.
President Andrés Manuel López Obrador ran for office vowing to stand up to the US and once said he would not allow Mexico to be Mr Trump’s “whipping boy”.
But some Mexican politicians felt he had given too much, too quickly, and they demanded to see details of the deal.
Ángel Ávila Romero, a senior member of the left-wing PRD party, said the agreement was “not a negotiation, it was a surrender”.
“Mexico should not militarize its southern border. We are not the backyard of Donald Trump,” he tweeted.
Marko Cortés, leader of the conservative National Action Party (PAN), said the sovereignty and dignity of Mexico had been damaged.
So what’s the situation on the US-Mexico border?
On Wednesday, US Customs and Border Protection said migrant detentions had surged in May to the highest level in more than a decade – 132,887 arrests, a 33% increase from April.
The detentions were the highest monthly total since President Trump took office.
Still, Mexico is calling the deal a victory. Compared with crippling tariffs on all exports to the United States that President Donald Trump had threatened to impose, starting at 5% on June 10th and escalating to 25%, just about any deal was going to look good for Mexico.
News of an accord reached by Marcelo Ebrard, Mexico’s foreign minister, to have the tariffs suspended indefinitely caused relief and celebration across the country—even before its contents became clear.
“Ebrard deactivates Trump,” screeched the front page of El Heraldo, a Mexican newspaper, the morning after the deal on June 7th. “Mexico wins,” ran another.
A saga that had threatened to cripple the still-young presidency of Andrés Manuel López Obrador became instead a crisis averted.
Mexico’s president announced that a rally he had planned in central Tijuana in “defense of national dignity” would now become a celebration of Mexico’s success at the negotiating table.
So lots of questions here folks.
Did we win or lose in the latest deal with Mexico?
In looking at the world economy, is a tariff on imported goods an effective tool?
If the cost of products rises as a result of tariffs imposed on goods from Mexico and China, are you willing to make the sacrifice and pay more knowing you are supporting the US and putting the hurt on foreign businesses?
Should the US lift all tariffs on foreign goods to keep consumer prices down while foreign businesses continue to impose tariffs on American goods?
Finally, what should be done with the money gained from imposing tariffs on foreign goods?