By Eduardo Saucedo*
Given the imposition of a 25% tariff to the goods that Mexico exports to the United States, news has begun to circulate that Mexican products sold in the United States will rise in price. But, How much will these products be raised for US consumers? The question can be answered by analyzing three scenarios.
Option 1: The consumer in the United States will pay the entire cost of the tariff (unlikely): A first scenario contemplates that the Mexican producer continues to export their products at the price that exported them before the tariff existed. The final price of the product would increase by 25% for the American consumer, who would pay the tariff in full. In this scenario, the United States consumer would be the most affected. Thus, the prices of Mexican products sold in the United States would rise at 25%. Given this situation, a company established in the United States would have incentives to produce some of the products made in Mexico. This would allow him to compete easier with Mexican products that are now more expensive due to the tariff. This scenario is very unlikely.
Option 2: The producer in Mexico will pay the entire cost of the tariff (unlikely): In an unlikely second scenario, the Mexican producer will export their products at a price 25% cheaper to how they exported them before the tariff. In this hypothetical case, the tariff would pay it in its entirety the Mexican producer, since it would sell its cheapest products to the United States in the magnitude of the tariff. Thus, the American consumer would not receive the imposition of the tariff, since he would end up paying the same price for the Mexican product he paid before. This scenario, the prices of Mexican goods in the United States would not change and local companies in the United States would not have incentives to produce the products that are imported from Mexico.
Option 3: The producer in Mexico will pay a part of the tariff and consumer in the United States the other part (highly probable)
The third scenario with a high probability is that the prices of Mexican products end up increasing for the consumer in the United States in a proportion less than the size of the tariff (25%). Likewise, it is highly likely that Mexican producers end up selling the products that export to the United States at a lower price as they sold them before, always in a percentage less than 25%. In this case, on the one hand, the Mexican producer would end up paying part of the tariff by selling their cheapest products and, on the other hand, the consumer in the United States would assume the other part of the tariff by paying a higher price for Mexican products. In sum, one part of the tariff would be charged to the Mexican producer and the other part to the consumer in the United States. By allowing prices to increase in some proportion in the United States, this scenario would encourage domestic production in the United States. For example, there could be incentives for the United States manufacturing companies to begin producing certain goods that occurred in Mexico, since those imported from that country would be more expensive.
Beyond these scenarios, the reality is that the tariff will reduce trade between Mexico and the United States and our well -being as a region. That is, the economies of both countries will lose with the imposition of tariffs. This is because US consumers will have more expensive products and Mexican exporters will export less, and very surely, they will have to sell their products at a lower price.
Remember that the objective of a tariff is to strengthen the internal production of the country that imposes the tariff. In this case, the United States imposed the tariff with the aim of encouraging more products to occur in that country, in addition to raising income from the tariff, becoming less dependent on the products that matter.
This path is difficult in many agricultural products that Mexico exports to the United States, since goods such as mango, avocado, coffee and endless other agricultural products cannot be produced in the United States with the same efficiency and quality with which they occur in Mexico. The United States should better specialize in the economic sectors where it is highly productive and not become a country that produces everything, just to demonstrate that it is not dependent on its geographical neighbors.
About the author:
*Eduardo Saucedo is director of the Department of Finance and Business Economy of Egade Business School of Technological of Monterrey.
The opinions expressed are only the responsibility of their authors and are completely independent of the position and the editorial line of Forbes Mexico.
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