Will Trump’s Mexico Plan Work? Yes, But…

The Mexico plan

Trump’s plan for Mexico is to (A) stop US manufacturing corporations from moving to Mexico, and (B) bring back those jobs to the United States.

Steps in Trump’s Mexico plan:

(1) Deport as many illegal immigrants as possible in the US from Mexico back to Mexico

(2) Persuade US corporations in Mexico to leave it and bring  back jobs to the US by giving them huge tax breaks and subsidies

(3) Build a giant Wall all along the US/Mexican border

(4) Levy a huge tax (like a 20% tariff) on imports of goods from Mexico into the US

What does each step accomplish?

(1) Illegal immigrants from Mexico won’t take jobs Americans might do

(2) US corporations will bring jobs back to the US; they’ll create new jobs for American workers

(3) The Wall will allow the US to keep illegal Mexicans out

(4) Huge taxes levied on Mexican goods trucked into the US for sale will ensure Americans buy American-made goods instead

How the Mexico plan could work

Let’s say Mexican workers in Mexico get $5 an hour to manufacture shirts in a US plant there. These shirts are exported to the US and sold by retail stores like Walmart or Target. The shirts sell in the US for $10 apiece.

Suppose each shirt made in Mexico takes a single worker one hour to make. It costs the company $5.

Then the US government persuades US corporations that make shirts to lay off workers in Mexico and bring back, keep, and/or create new jobs for American factory workers.

However, American workers say they can’t live on $5 an hour—fast food workers get $8 an hour. And a new American factory worker gets almost $10 an hour.

Shirt manufacturers in the US can’t make any profit if they pay US workers $10 an hour and still sell their shirts for $10. Now the US shirt manufacturer must sell each shirt for $15.

What if Mexico takes over abandoned plants in Mexico and starts making its own shirts to sell for $10?

That’s where the the huge tax on Mexican exports to the US (maybe as much as $5 a shirt) comes in. Mexican shirts won’t be cheaper anymore. Now everyone in the US will pay $15 instead of $10 for a shirt that is made-in-America

This rise in the price of these all-American shirts isn’t due to inflation. It’s due to the higher cost of living in the US than in Mexico. It’s real dollars.

But…..

This example about shirts shows how a government creates “wealth transfers”. Governments take money from one person’s pocket and put it into another person’s pocket.

Governments can force people to leave the country or not enter it. The can tax people and give subsidies to corporations. Governments can seize people’s property and either build a giant Wall or create better infrastructure (streets, roads, highways, bridges, railroad tracks, dams, power plants, etc.)

All governments have great powers. The difference is that in this country we, the people, give our governments those powers.

But let’s stop here and ask, “Why would any profit-making US corporation agree to stop manufacturing in Mexico?

When a US corporation leaves Mexico, that US business has to charge higher prices for shirts. That US company is bound to lose sales—even if the government puts a tax on all other foreign and American competitors selling shirts in the US for a lower price. People paying higher prices will buy fewer shirts.

Why comply with Trump? Because the US government offers US companies such huge tax breaks and subsidies. Many US corporations need the money – they are deeply in debt right now.

US corporations have invested in robotic devices to replace workers and run up huge debt. They see bank loan interest rates rising soon. Their investors are fleeing the corporate bond market to make money from stocks. Corporate cash as a whole in the US has been steadily plummeting.

The winners and losers

Let’s look at who in the US wins and who loses from Trump’s Mexico plan:

The winners?

  • The relatively small number of unemployed Americans who get new jobs in manufacturing
  • US corporations which get huge tax breaks and subsidies to create jobs (and their shareholders)
  • US government – taxes on imports from Mexico for 1 year will be $13-$15 billion and pay for the Wall
  • State and local governments that collect higher sales taxes on costlier made-in-the USA goods

The losers?

  • Every single person in the USA who must pay more money for made-in-the-USA goods
  • US corporations that import raw materials or semi-finished goods and pay 20% more for the border tax
  • U.S. tax payers for corporate tax breaks ($2.6-$10 trillion) and 11 million deportations ($400-$600 billion)
  • U.S. shoppers who will need to pay higher sales-tax rates on higher-priced made-in-the USA goods

Here’s what I think.

I got my start at age 18 working full time in a diode factory in Pennsylvania. I’ve spent over two years of my life working in  factories that made: in Wisconsin—floor tiles, and tacos; and in South Carolina—textiles, and printed cotton cloth. I know first-hand just how important these jobs were to me and are to other Americans.

But Trump’s Mexico plan isn’t the right way to create new jobs in the US. The financial and human costs will be far greater than the rewards.

I believe the people our work has made rich, at least those as hugely rich as our President, should start paying taxes for what we’ve done for them. They should help us when we need it, not the other way around.

Note: For a simpler explanation of “border adjustment taxes” and “wealth transfers” via government, see this short video, narrated and with cartoon illustrations by Professor Robert Reich

Update: According to a Financial Times report on August 1, 2017, Trump’s border tax plan has been “ditched” by the administration.

 

 

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