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White House Floats 20 Percent Import Tax To Pay For Its Mexican Wall -- Then Walks It Back

27/01/2017 9:24 AM AEDT | Updated 27/01/2017 10:03 AM AEDT
Bloomberg via Getty Images
U.S. President Donald Trump gestures while walking towards the White House after arriving on the South Lawn of the White House in Washington, D.C., U.S., on Thursday, Jan. 27, 2017. Mexico's President Enrique Pena Nieto canceled a meeting with Trump planned for next week as a dispute over the president's border wall plan exploded into a showdown that threatens one of the worlds biggest bilateral trading relationships. Photographer: Andrew Harrer/Bloomberg via Getty Images

Donald Trump’s top spokesman suggested Thursday that the president would be open to massive tax increases on imports, specifically though not exclusively with Mexico, as part of a broader reform package to pay for a border wall between the U.S. and Mexico.

No sooner had White House press secretary Sean Spicer suggested the 20 percent hike on imports, then he took it back, amid wide-ranging criticism from fellow Republicans and befuddlement from reporters and observers who noted how odd it was to make policy on the fly.

The exchange left the indelible impression that the Trump administration is struggling to meet its long-standing promise to make Mexico pay for the wall the president wants to construct. It also underscored the gap that continues to exist between the White House and congressional Republicans on tax policy.

White House Chief of Staff Reince Priebus tried to downplay Spicer’s remarks further, telling NBC News’ Peter Alexander that the import tax was one among a “buffet of options.”

If enacted, such a tariff would likely raise prices for American consumers, as well as violate the North American Free Trade Agreement, inviting retaliatory tariffs from Mexico on American goods. The announcement ― made just hours after Mexican President Enrique Peña Nieto canceled a trade meeting with Trump in response to Trump’s insistence that Mexico would pay for the border wall ― will likely escalate the already-tense relationship between the Trump administration and the Mexican government.

“This is something that we’ve been in close contact with both houses [of Congress] in moving forward and creating a plan,” Spicer told reporters. “It clearly provides the funding and does so in a way that the American taxpayer is wholly respected.”

The top U.S. imports from Mexico in 2015 were vehicles ($74 billion) and electrical machinery ($63 billion). The country is also the second-largest source of agricultural goods imported to the United States.

Assuming the tax would apply to all Mexican exports, Americans could end up paying higher prices on everything from American-made cars, which often rely on Mexican parts, to fresh vegetables and fruits.

“The U.S. automobile supply chain is heavily integrated with Mexico and Canada. If you start monkeying around with tariffs along that supply chain, you’re pushing costs up,” said Josh Bivens, research and policy director at the Economic Policy Institute, a progressive think tank often skeptical of free-trade agreements.

In his comments to reporters, Spicer implied that such a tax is common among countries with free trade relations.

“We are probably the only major country that doesn’t treat imports this way,” he said.

In truth, Mexico has a 16 percent value-added tax on all goods, domestic and foreign. The Mexican government reimburses companies in its country for the tax if they export the product, but Mexican companies pay the full tax if they sell the goods domestically. In that way, Mexico still complies with NAFTA by ensuring U.S. goods an “even playing field” in the Mexican market, according to Bivens.

By contrast, Bivens argued, levying a 20 percent tax on Mexican exports into the U.S. market would violate NAFTA by limiting Mexican access to the American market. Mexico would, in turn, be legally entitled to retaliate with a tariff of its own on American goods.

“If you’re trying to make Mexico pay for the wall, this is not how you do it. This is U.S. consumers paying for it,” Bivens concluded.

Those watching the news unfold were shocked by the policy being floated:

As a candidate, Trump routinely slammed NAFTA, a 1994 trade agreement between the U.S., Canada and Mexico. He has made renegotiating the agreement to extract more favorable terms for U.S. manufacturers a top priority in the first weeks of his administration. In addition to the now-canceled meeting with Peña Nieto, Trump has plans to meet with Canadian Prime Minister Justin Trudeau in the coming weeks.

This post has been updated with reactions to the proposed policy.

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