Tuesday , April 25 2017
Home / Keith Weiner / What Will a 20% Tariff Do?

What Will a 20% Tariff Do?

Summary:
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 . Will people pay 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,

Topics:
Keith Weiner considers the following as important:

This could be interesting, too:

Bas van der Vossen writes Against intervention – ex ante / ex post

Jacob T. Levy writes A government of laws, not son-in-laws

Mike Munger writes Jessica Flanigan’s “Hayek Lecture” at Duke

Lauren Hall writes Design, Complexity, and Freedom

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…

0 0
Keith Weiner
Keith Weiner is CEO of Monetary Metals, a precious metals fund company in Scottsdale, Arizona. He is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. He is founder of DiamondWare, a software company sold to Nortel in 2008, and he currently serves as president of the Gold Standard Institute USA. Weiner attended university at Rensselaer Polytechnic Institute, and earned his PhD at the New Austrian School of Economics.

Leave a Reply

Your email address will not be published. Required fields are marked *