What Will a 20% Tariff Do?

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trade shipping

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…

 

Originally published on Keith Weiner Economics.

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