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How higher border taxes could affect the U.S., other countries and your family budget

Protesters paint the border fence below a newly finished slogan reading “Neither delinquents nor illegals, we are international workers” in Ciudad Juarez, Mexico, on Feb. 26. President Donald Trump has proposed a tax — his most recent proposal was 20 percent — on Mexican imports to pay for a wall on the U.S.-Mexican border. During the campaign, he also suggested a 45 percent tariff on Chinese imports.
Protesters paint the border fence below a newly finished slogan reading “Neither delinquents nor illegals, we are international workers” in Ciudad Juarez, Mexico, on Feb. 26. President Donald Trump has proposed a tax — his most recent proposal was 20 percent — on Mexican imports to pay for a wall on the U.S.-Mexican border. During the campaign, he also suggested a 45 percent tariff on Chinese imports. AP

Major U.S. retailers don’t want taxes on imports and are lobbying hard against them in any form. But Donald Trump got strong support whenever he advocated import taxes, so keeping them out of the picture entirely may be impossible.

Best Buy, Target, Walmart, Sears and any other retailer that sources much merchandise abroad are concerned. Why, exactly, should they care? Should you?

There are different scenarios for how new border taxes might hurt retailers.

One is that a tax on imports would raise the cost of retailers’ merchandise, hurting them economically. Retailing is a competitive, low-margin sector. If retailers have to pay a tax of, say, 20 percent to get things into this country from foreign suppliers, they won’t be able to pass much of that along to customers, so this cost will reduce profits. This will limit their investing in new facilities, hiring more workers and giving raises.

At its core, this is simplistic. The logical flaw is a fallacy of composition.

Yes, an import tax in the ranges discussed would raise the cost of Target’s or Walmart’s merchandise. And yes, retailing is competitive. No single retailer can raise prices much without seeing shoppers go elsewhere.

But if all retailers face identical merchandise-cost increases, then the overall market price for their merchandise will rise. No individual store or corporation is particularly disadvantaged relative to others. Consumers will pay more, just as when a frost wipes out oranges, sending prices higher. But, as in that case, retailers handling the merchandise are not condemned to lower margins.

Advocates of import taxes argue that firms could source more goods from U.S. manufacturers. That is the very point of the tariff. And as the price advantages of foreign producers are erased by the tariffs, U.S. production will rise. Retailers made money 30 years ago when a higher fraction of their merchandise came from U.S. producers, and they will be able to make money if we get back to that. That is the hope of tariff advocates.

Skeptics will disagree, noting that for many products, there no longer are manufacturers in our country, and it takes years to build factories and train workers. If we suddenly tax imports, there won’t instantaneously be alternative U.S.-produced goods waiting for delivery to U.S. stores. This clearly is correct.

A second scenario is that even if import taxes are largely passed on to consumers and retailers can maintain margins on what they sell, the implicit effect will be a cut in people’s disposable incomes. After absorbing the tax on items made abroad, households will have less to spend on other things.

If higher costs due to import taxes mean households can buy only fewer goods in total, then retailers’ sales will fall. The fact that retailers may maintain margins on units they still sell is of little comfort if overall sales drop.

This scenario is more realistic than the naive one that assumes retailers must eat the tax. If this is what managers at companies like Target and Best Buy fret about, they are on the right track.

But the implications of this scenario go beyond these directly affected firms. If a family has to pay more for clothing, housewares, toys and electronics because of import taxes, they will indeed buy less of them. But their purchases of things not even imported may also be affected. If you know clothing and school supplies will cost more, you may decide you cannot eat out as often or cannot visit a resort as usual. Maybe your budget stretches so tight you need to give up yoga or not go hunting.

The dampening effects thus can spread further than the immediate imports taxed. Yes, import restrictions well may raise employment and profits in U.S. companies that compete with imports. And revenues from import taxes may allow other taxes to be cut, freeing up money to bolster household consumption. These arguments persuade import-tax advocates but not most economists.

This brings us to the third scenario for concern in corporate suites in Bentonville, Ark., Minneapolis and elsewhere. It is a generalized one that will resonate most with economists and historians.

Imposing taxes on imports in the ranges discussed will be a major shock to the world economy. U.S. imports well may shrink, but so will our exports, and so will the broader national economy.

The Chinese economy will suffer a blow. So will Europe. Slowing economic activity in the northern hemisphere means southern hemisphere commodity exporters will slump. A global economy in recession means a U.S. economy in recession. Virtually all businesses will see lower sales and much lower profits. Retailers will suffer, but they won’t be alone. Everybody will be in a slump everywhere.

To anyone who has studied a bit of economic history, the proposed tax levels currently bandied about seem surreal. At differing times, candidate Trump called for 20 percent, 35 percent or 45 percent import taxes on goods from sundry other nations.

If you consider that before NAFTA the average U.S. tariff on imports from Mexico was only 2.9 percent, you can see why current rhetoric strikes most economists as crazy.

But we live in an age when nothing is impossible.

St. Paul economist and writer Edward Lotterman can be reached at boise@edlotterman.com.

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