Hours after Mexican President Enrique Pena Nieto cancelled his first meeting with President Donald Trump the US administration mooted a 20% tax on imports from Mexico to pay for a wall along the southern US border.
The tax plan was first put by White House press secretary Sean Spicer to reporters on Air Force One as Trump returned from a congressional Republican retreat in Philadelphia.
“When you look at the plan that’s taking shape now, using comprehensive tax reform as a means to tax imports from countries that we have a trade deficit from, like Mexico, if you tax that $50bn at 20% of imports,” Spicer said on the president’s plane. By doing that we can do $10bn a year and easily pay for the wall just through that mechanism alone,” he said.
Spicer did not say how such a tax would work or affect US consumers and companies. Asked if the tax could be applied to other countries, Spicer said the administration was “focused on Mexico right now”.
Later, Spicer summoned reporters to his office and said the tax was only “one solution” to pay for the wall and might be applied at a lower rate. He said its economic effect would have to be examined.
The comments nonetheless suggested the White House is moving toward a “border adjusted” tax plan on companies’ domestic sales and imports that is favoured by House Republicans to replace US corporate tax.
House ways and means chairman Kevin Brady, a Texas Republican and backer of the approach, called Spicer’s comments “very encouraging news”.
Spicer’s remarks come amid conflict between Trump and Mexico that escalated over a 24-hour period after the US president signed a directive on Wednesday to initiate the process of building the border wall. Trump’s border plan rapidly exploded into a showdown that threatens one of the world’s biggest bilateral trading relationships.
The cross-border sparring prompted a drop in the Mexican peso, which fell 0.7% to trade at 21.21 to the dollar after Pena Nieto’s announcement. Mexico’s currency has plunged almost 14% since Trump’s election on concern that he will renegotiate or scrap the North American Free Trade Agreement.
After Pena Nieto said on Wednesday that Mexico would refuse to pay for a barrier on the US southern border, Trump blasted him with a tweet on Thursday morning. “If Mexico is unwilling to pay for the badly needed wall, then it would be better to cancel the upcoming meeting,” Trump wrote.
Pena Nieto, who was to meet with Trump January 31, responded a few hours later, tweeting: “This morning we’ve informed the White House that I won’t attend the working meeting scheduled for next Tuesday with @Potus.”
Higher prices
The border tax Trump floated would not be imposed directly on Mexico but instead added to the cost of products as they crossed the border. That would cut profits of companies that import goods — such as Ford Motor, Walmart and Target — or mean higher prices for US consumers who buy the products.
“Mexico doesn’t pay for the wall,” said Jared Bernstein, senior fellow at the Centre on Budget and Policy Priorities. “American consumers who shop at places that import, like Wal-mart and Target, pay for the wall, making it a regressive tax supporting a dumb, wasteful idea.”
The National Retail Federation condemned the plan hours after it surfaced. “Americans are already paying billions of dollars in tariffs, and this is just going to result in one more price increase,” said David French, senior vice-president of the trade group.
Republican Senator Lindsey Graham of South Carolina tweeted: “Border security yes, tariffs no. Mexico is third-largest trading partner. Any tariff we can levy they can levy. Huge barrier to econ growth.
“Simply put, any policy proposal which drives up costs of Corona, tequila, or margaritas is a big-time bad idea. Mucho sad.”
Senator Ben Sasse, a Nebraska Republican who opposed Trump’s election, tweeted: “Tariffs are a tax on American families.”
Tax overhaul
A border adjustment tax would radically remake the US corporate tax system. The House Republicans’ plan would apply a 20% tax rate to companies’ domestic sales while exempting their exports. Under the plan — which would apply to all countries, not just Mexico — businesses could no longer deduct the cost of imports they use or sell. The plan would generate about $1.1-trillion in revenue over a decade, according to an analysis by the conservative Tax Foundation.
Brendan Buck, a spokesman for House speaker Paul Ryan, said that Spicer was describing the Republicans’ tax plan.
At present, the US taxes its corporations’ worldwide income at 35% though they can use foreign tax credits to reduce that and companies don’t have to pay any US tax on overseas income until they move it to the US
Ryan and Senate majority leader Mitch McConnell both suggested on Thursday that, after months of studiously ignoring the border-wall proposal, they were ready to act on the barrier as part of a spending request they expect from Trump to help get building going.
The two congressional leaders said they were ready to spend as much as $15bn in federal funds to build the wall.
Trump promises
Trump won office with two central campaign promises: construction of a wall along the 3,182km border, at Mexico’s expense, to curb illegal immigration and stop a decline in US manufacturing jobs.
Also at issue is the Nafta accord to which the US, Mexico and Canada are parties. The US and Mexico traded $531bn in goods and services in 2015, almost five times the trade between the US and UK. Mexico is the third-largest trading partner with the US, after China and Canada, and sends nearly 80% of its goods to the US.
Mexican Foreign Minister Luis Videgaray and Economy Minister Ildefonso Guajardo have been discussing the agreement since Tuesday with Trump administration officials in Washington.
“Negotiations are paralysed,” said Jose Antonio Crespo, a political analyst at the Centre for Economic Research and Teaching in Mexico City. “It’s clear that Trump made this decision, because he imposed conditions that are unacceptable.”
Bloomberg