We are currently engaged in multiple debates about what trade and trade agreements do. For those, we need to be clear-eyed in our analysis. Or at least not delusional. If the President wants to fund his wall, he will have to look somewhere other than the USMCA.
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Somehow, this week, the ‘trade’ and ‘government shutdown’ storylines managed to converge. President Donald Trump had originally threatened a government shutdown if he did not get $5 billion to pay for the wall he promised to build along the Mexican border.
In the face of stiff Congressional resistance, the President had to find a way to back down. But if Congress was not going to appropriate the money, how could his wall be paid for? That question was posed to White House Press Secretary Sara Huckabee Sanders, who replied:
Look, we’re not asking American taxpayers for that… The president has been clear that the USMCA deal would provide additional revenue through that deal that would show that Mexico has paid for the wall.”
This sounds ridiculous – and it is. But it may be instructive to work through why. So, let’s consider how the USMCA could conceivably pay for the President’s wall.
First, we need to assume that the agreement, signed on November 30, can actually get through Congress. That is by no means a sure thing, but that’s an issue for another column. For the moment, let’s assume it does.
Then, there is the question of whether one can raise revenue by cutting tariffs? After all, the point of a trade agreement is to lower barriers. The answer is actually yes, but not when you cut tariffs to zero. Tariff cuts can raise revenue when the initial tariff is high enough that it seriously restricts trade. As the tariff drops, trade flows can increase.
