Tariff for a Wall: R-E-L-A-X

The beauty of free market competition is the basis for success of the proposed 20% import tariff on Mexican goods. Let’s put aside any political views and look strictly at the economic effect of the proposal.

If Mexico has a monopoly on a given product, then the 20% tariff would necessarily be paid by the U.S. customer because there was no other place to get the product. That might be the case with blue agave tequila, but not with tomatoes or pineapples or mangoes or limes.

If tomatoes are selling for $1.00 per pound in Chicago in the middle of winter, then the economics dictate what the price paid to the grower will be. Let’s say in this example that the retailer gets 40 cents, transportation costs 6 cents, the packing shed gets 4 cents and the Florida grower gets the remaining 50 cents.

If a Mexican grower wants to sell his tomatoes he will have to provide product that can be sold for the same price as the Florida grown product. Starting at $1.00 and taking off the 40 cents for the retailer leaves 60 cents. From that take off the transportation costs from Nogales (a little higher at 10 cents) leaving the product to cost 50 cents at the port of entry. Assuming that will face a 20% tariff, take off another 10 cents. That puts the product at 40 cents per pound on the Mexican side of the border. Then deduct transport from the packing shed to the border and packing costs (10 cents) and that leaves the grower with 30 cents. If the grower can live with 30 cents, then he will sell to the Chicago retailer. If not, that retailer will buy them from Florida. Or Puerto Rico. Or Honduras. Or Canada. Or wherever the economics dictate that the supply will meet the demand.

The same thought process holds true for all other fresh market agricultural products. It is much easier to adjust supply to meet demand in agricultural trade, however, the process will work substantially parallel in hard goods manufacturing (appliances and automobiles), albeit over a longer period of time. Like our Green Bay Packers quarterback says: R-E-L-A-X.