Making Mexico Pay for the Wall (Redux)

So we’re back to this again? From CNN:

“They can pay for it indirectly through NAFTA,” Trump said Thursday in an interview with The Wall Street Journal. “We make a good deal on NAFTA, and, say, ‘I’m going to take a small percentage of that money and it’s going toward the wall.’ Guess what? Mexico’s paying.”

I must confess some confusion as to exactly where the money is to come from:

But Trump has also previously suggested that he would seek indirect payment from Mexico to fund the wall. His latest assertion suggested he would direct a surplus in revenue from improved trade with Mexico toward paying for the wall — though he did not lay out a mechanism for doing so. [emphasis added]

The fact that the bigger trade surplus is going fund the wall is strange — does that mean he’ll expropriate some of the export revenue. That sounds like an export tariff (which is not WTO compliant). Or is he confusing trade export revenue with government budget revenue, as in this case? For now, I’ll just discount this statement as mere confusion.

So let me assume he means by “better deal” higher tariff rates. I’ll reprise this analysis from February.

First consider the canonical analysis, where the US is considered a small country (in the context of US-Mexican trade):

Figure 1

The tariff t raises the price faced by US consumers, producers, by the entire 4% of the tax. The resulting deadweight (efficiency) loss is the pink area in panel (b). Let’s put some numbers to the graph.

US imports of goods and services from Mexico was $316.4 billion in 2015. If the US exits Nafta, the tariff rate reverts to MFN/NTR rates of about 4%, and the price elasticity of imports is 3.8% (Spearot, 2015, Table 2), then imports fall by $44.6 billion. Consumption side and producer side deadweight loss is about $0.9 billion, while tariff revenues equal $10.9 billion. In this depiction, the entire tax burden is borne by US consumers.

A more realistic interpretation is to assume the US and Mexico are roughly equal size (in trade, not GDP, terms). This is depicted in Figure 2.

Figure 2

For simplicity, assume supply and demand elasticities are the same, so half the incidence of the tax falls on the US, half on Mexico. Then import prices rise by 2%.

Imports fall from $316.4 billion to $294.1 billion. Tariff revenues are $11.8 billion; $5.9 billion of the tariff revenue is borne by US consumers. There is a terms of trade gain to the US, since we force Mexico to sell its goods to the US at a lower price.

“So-called President” Trump has suggested at various instances a 35% tariff. This would drive down imports to $163.2 billion. Total tariff revenues are $57.1 billion — more than enough to pay for building the wall (at $12-$40 billion). Of this amount, $28.6 billion is from American consumers.

All of this is mostly an illustrative exercise. It’s also important to recall that it’s a partial equilibrium exercise. GDP effects are not incorporated (both Keynesian and supply side). Nor are financial side implications, such as the impact on capital flows and exchange rates. And obviously, retaliation is not accounted for…
One important subtlety: the analysis presumes final goods; but possibly 40% of US imports from Mexico are intermediate goods.[1](p.6). Then it’s important to remember negative ERPs.

So, to recap — assume $18 billion is the cost oif the wall (estimates range to $40 billion), then it takes at least 3 years of tariffs at MFN levels to get the requisite funds from Mexico. Along the way, Americans pay higher prices to the tune of about $6 billion a year. And that’s assuming no retaliation that would reduce US exports to Mexico…

I expect more ideas to emanate from the Administration (we’ve gone through transfers fee, visa fees, border tax, tariff, etc.). Here is what the Trump campaign proposed, in Pay for the Wall:

Introduction: The provision of the Patriot Act, Section 326 -the “know your customer” provision, compelling financial institutions to demand identity
documents before opening accounts or conducting financial transactions is a
fundamental element of the outline below. That section authorized the
executive branch to issue detailed regulations on the subject, found at 31 CFR
130.120-121. It’s an easy decision for Mexico: make a one-time payment of $5-
10 billion to ensure that $24 billion continues to flow into their country year
after year. There are several ways to compel Mexico to pay for the wall
including the following:

  • On day 1 promulgate a “proposed rule” (regulation) amending 31
    CFR 130.121 to redefine applicable financial institutions to include
    money transfer companies like Western Union, and redefine “account” to
    includewire transfers. Also include in the proposed rule a requirement that
    no alien may wire money outside of the United States unless the alien
    first provides a document establishing his lawful presence in the United
  • On day 2 Mexico will immediately protest. They receive approximately $24
    billion a year in remittances from Mexican nationals working in the United
    States. The majority of that amount comes from illegal aliens. It serves as de
    facto welfare for poor families in Mexico. There is no significant social safety
    net provided by the state in Mexico.
  • On day 3 tell Mexico that if the Mexican government will contribute the funds
    needed to the United States to pay for the wall, the Trump Administration will
    not promulgate the final rule, and the regulation will not go into effect.
  • Trade tariffs, or enforcement of existing trade rules: There is no doubt that
    Mexico is engaging in unfair subsidy behavior that has eliminated thousands
    of U.S. jobs, and which we are obligated to respond to; the impact of any tariffs
    on the price imports will be more than offset by the economic and income
    gains of increased production in the United States, in addition to revenue from
    any tariffs themselves. Mexico needs access to our markets much more than
    the reverse, so we have all the leverage and will win the negotiation. By
    definition, if you have a large trade deficit with a nation, it means they are
    selling far more to you than the reverse – thus they, not you, stand to lose from
    enforcing trade rules through tariffs (as has been done to save many U.S.
    industries in the past).
  • Cancelling visas: Immigration is a privilege, not a right. Mexico is totally
    dependent on the United States as a release valve for its own poverty – our
    approvals of hundreds of thousands of visas to their nationals every year is
    one of our greatest leverage points. We also have leverage through business
    and tourist visas for important people in the Mexican economy. Keep in mind,
    the United States has already taken in 4X more migrants than any other
    country on planet earth, producing lower wages and higher unemployment
    for our own citizens and recent migrants.
  • Visa fees: Even a small increase in visa fees would pay for the wall. This
    includes fees on border crossing cards, of which more than 1 million are
    issued a year. The border-crossing card is also one of the greatest sources of
    illegal immigration into the United States, via overstays. Mexico is also the
    single largest recipient of U.S. green cards, which confer a path to U.S.
    citizenship. Again, we have the leverage so Mexico will back down.

Conclusion: Mexico has taken advantage of us in another way as well: gangs,
drug traffickers and cartels have freely exploited our open borders and
committed vast numbers of crimes inside the United States. The United States
has borne the extraordinary daily cost of this criminal activity, including the
cost of trials and incarcerations. Not to mention the even greater human cost.
We have the moral high ground here, and all the leverage. It is time we use it
in order to Make America Great Again.

45 thoughts on “Making Mexico Pay for the Wall (Redux)

  1. Moses Herzog

    Menzie, I have read your blog off and on since around 2009. I have been visiting more recently because of the obvious negative (“negative” hear read as HORRIFIC) implications of the Trump circus freak show and also that my FORMER favorite blogger (James Kwak) has become less prolific and frankly less enlightening even when he writes. I’m making a short story long here—suffice it to say your blog is a GODSEND, both enjoyable to read and a great way to exercise the cerebellum. I hope your blog reigns supreme until the sad day you croak, or you find another person with near your analytical acumen to take the helm. God bless you sir.

  2. joseph

    “Tariff revenues are $11.8 billion; $5.9 billion of the tariff revenue is borne by US consumers.”

    I don’t think you understand Trump arithmetic. US consumers pay $5.9 billion and Mexican consumers pay $5.9 billion. The two cancel out so the wall is free.

  3. PeakTrader

    “Mexico is totally dependent on the United States as a release valve for its own poverty.”

    I’ve heard that before. Why do we need to import poverty, because of Mexico’s poor policies? Shouldn’t Mexico change its policies instead?

      1. PeakTrader

        Of course, most poor immigrants are good and hard working people, who are victims of their corrupt governments. However, our immigration policies created a huge imbalance of below average skilled people to above average skilled people, in need of tax credits, education, healthcare, etc., given their low incomes. Their governments should’ve provided these services. We now need to bring a lot more skilled people into the country to rebalance.

    1. PeakTrader

      You want to take money from “…the typical (illegal) immigrant works 60 hours per week and earns perhaps $28,000 per year.”!?

      1. PeakTrader

        Illegal immigrants may not receive too many welfare benefits. The bigger problem is immigrants, and perhaps their children, in general:

        Immigration and Welfare Magnets
        George J. Borjas, Harvard University and National Bureau of Economic Research

        “…Income-maximizing behavior implies that foreign-born welfare recipients, unlike their native-born counterparts, may be clustered in the states that offer the highest benefits. The empirical analysis indicates that immigrant welfare recipients are indeed more heavily clustered in high-benefit states than the immigrants who do not receive welfare, or than natives. As a result, the welfare participation rate of immigrants is much more sensitive to changes in welfare benefits than that of natives.

        1. PeakTrader

          In 2013, immigrants and their children in the U.S. accounted for roughly 80 million people or over 25% of the population (41 million immigrants). In California, Hispanics outnumber whites, and there’s a large Asian population.

          A realtor told me a couple of years ago, two or three Vietnamese families often buy one house in Orange County and all three families live in it! How times have changed.

          1. pgl

            It is Dr. King’s birthday and you decide to celebrate it with one racist tirade after another. I would ask you if you have no shame but the answer is obvious. You don’t.

      2. Steven Kopits


        I believe we should issue enough visas to cover the market, and let the Mexicans set the price. Without question. Not even a close call.

        The current system, based on IRCA of 1986, produces the following results:

        – 500-700 deaths (maybe more) of illegal migrants trying to cross illegally into the US
        – 10,000 cases of associated rape annually
        – 10,000 cases of associated human trafficking for forced labor or prostitution annually
        – at least 10,000 cases of involuntary drug smuggling (and maybe many times that) annually
        – continuing stress and uncertainty for eleven million illegal immigrants in the US about their status
        – inability of illegal immigrants to operate normally (ie, rent property, get mobile phone, driver a car, etc.)
        – inability off undocumenteds to leave the US and lower costs in the off-season (principally for male seasonal workers)
        – inability to visit with family in Mexico
        – pointless expenditure and lost revenue of $30 bn annually for the federal government
        – unnecessary conflict over sanctuary cities
        – hundreds of thousands of undocumenteds running through the backyards of Arizona and Texas
        – major unhappiness by conservatives, and frankly, anyone with property near the Mexican border
        – a militarized and un-American wall at the border
        – heightened drug trade in northern Mexico

        I could go on. I think current policy is an abomination. IRCA is the worst piece of native American legislation since the Trail of Tears.

        And we can make it go away with market-based work visas. Absolutely.

  4. joseph

    PeakTrader: “Of course, most poor immigrants are good and hard working people, who are victims of their corrupt governments. However, our immigration policies created a huge imbalance of below average skilled people to above average skilled people, in need of tax credits, education, healthcare, etc., given their low incomes.”

    PeakTrader is flying his racist flag again. PeakTrader endorses Trump’s statement that “that when Nigerians see America they never want to go back to their huts.”

    Turns out that Nigerian Americans are the most highly educated immigrants in the U.S. Two-thirds have college degrees, a rate even higher than the Republican celebrated “hardworking” Asian-American immigrants. The Nigerian immigrant college rate is twice that of the average American.

    By the way, here is a picture of Nigerians in their huts, demonstrating Trump is the most ignorant, bigoted person to ever occupy the White House:

    Trump says he wants immigration to be based on meritocracy, where merit is measured by how white your skin is, preferably Scandinavian.

    Oh, and curiously, Trump has falsely claimed that his father immigrated from Sweden. But it is documented that Trump’s father actually came from Germany. Trump really is hung up on racial identity. He has also repeatedly attributed his success to his superior genes.

    1. PeakTrader

      Joseph plays the race card again. Trump is not politically correct and everyone who knows him knows he’s not racist. Real people don’t talk like politicians, in corporations, the military, locker rooms, etc.. Joseph, like the liberal media, don’t report facts, he creates fires and furiously fans the flames in his state of hysteria. Many people are rightly alarmed what kind of country their children will live in.

      1. pgl

        “Joseph plays the race card again. ”

        This is the pot calling the kettle black. You really have no ethics or integrity.

    2. pgl

      “PeakTrader is flying his racist flag again. ”

      And on Dr. King’s birthday. I wish he would have taken a break from his intellectual garbage today. Of course a permanent break would be even better.

  5. joseph

    PeakTrader: “Many people are rightly alarmed what kind of country their children will live in.”

    By which you and Trump mean a country that is no longer majority white.

    Look, there is no secret that Trump is a racist. He thinks Nigerians all live in huts. He thinks all Haitians have AIDS. He thinks Mexicans are rapists (and bad federal judges). He thinks Jews make great accountants. He thinks Norwegians are preferable to Africans.

    Believe the neo-Nazis and white supremacists who have reveled in Trump’s statements and declare him one of their own.

    1. PeakTrader

      Let’s be honest. There’s been a shift in demographics that concerns people. For example, many parts of California look like the Third World cities and villages the immigrants came from, except for the concrete and running water. Yes, they went from 90% white to 70% Hispanic and many Americans are concerned about the values they bring. It’s a seismic and and rapid shift. It’s natural many Americans are concerned and even fearful. That doesn’t mean they’re racist, including Trump.

      1. Menzie Chinn Post author

        PeakTrader: The values they bring? Do you mean Catholicism? If one treats someone differently because of their race/ethnic origin, isn’t that the definition of racism? (I think I’m paraphrasing Representative Paul Ryan here.).

          1. PeakTrader

            It seems, the masses in Venezuela didn’t learn anything from Cuba, until it all went into the gutter.

      2. pgl

        “Let’s be honest.”

        That would be good advice but you are never honest. Your racism today is just off the charts.

        1. PeakTrader

          You’re the one, who keeps bringing up race, like someone who hates whites, along with hating republican minorities.

  6. 2slugbaits

    FreeLuncher Most Americans don’t want to live in a Venezuela or Cuba.

    This is rich. Giving Cuban immigrants special treatment has been a bedrock principle of the GOP since forever. Conservatives don’t seem to have any problems if immigrants from one s***hole country come to our shores (they get automatic legal status) as long as they reliably vote Republican in Florida; but those same conservatives have tizzy fits if immigrants from other s***hole countries try to come here. But then again, conservatives have never been known for logical consistency.

  7. joseph

    PeakTrader: “Yes, they went from 90% white to 70% Hispanic and many Americans are concerned about the values they bring. It’s a seismic and and rapid shift. It’s natural many Americans are concerned and even fearful. That doesn’t mean they’re racist, including Trump.”

    It seems that PeakTrader is unable to grasp the simple fact that Hispanic Americans and African Americans and Asian Americans and Muslim Americans are Americans too.

    Whenever he uses the word “Americans”, as in the quote above, he means white Americans. In his mind, they are the only ones who count. He has made this clear many times — as in “American healthcare is the greatest in the world as long as you don’t count African Americans.”

    1. PeakTrader

      There are also many minority Americans, who are concerned about too many poor immigrants. And, when you compare life expectancies between two countries, e.g. the U.S. and Germany, the black population needs to be controlled for an apples to apples comparison, since only 1% of Germany is black compared to 13% in the U.S., and the U.S. black population has a lower life expectancy.

  8. 2slugbaits


    The country can and should absorb some poor immigrants from various countries.

    And then in your very next post:

    There are also many minority Americans, who are concerned about too many poor immigrants.

    Hey. No contradiction there.

    And, when you compare life expectancies between two countries, e.g. the U.S. and Germany, the black population needs to be controlled for an apples to apples comparison

    Ummmm….excuse me, but it’s the life expectancy for white males that’s declining in the country. Life expectancy for blacks is actually increasing. Your theory would seem to have some serious difficulties trying to explain those trends.

  9. Ed Hanson


    I can only remind you what one of our morning radio guys has to day about the left and the race card;

    If that is all they got, they got nothing.

    1. PeakTrader

      Ed Hanson, Trump has shown the American people the mainstream media is the propaganda wing of the Democrat party – I never imagined they’d make NPR look conservative! – they are determined to label Trump a racist – it seems to be a matter of life or death to them. However, it looks like Trump’s label of Dick Durbin will stick instead: “Tricky Durbin.”

    2. 2slugbaits

      Ed Hanson You should switch radio stations. How about trying NPR?

      If that is all they got, they got nothing.

      Well, I don’t know about you and your radio DJ friends, but it seems to me that a blatantly racist president with a long history of racism ought to be enough. Of course, that’s not all there is. The “left” also has concerns about Russian influence in the election, Trump obstructing justice, a godawful tax deform law, China moving in after the Donald cancelled TPP, an unstable egomaniacal NK leader playing chicken with an unstable egomaniacal US president, a stalled budget process and now the possibility of the Turkish military firing on US military personnel as well as cozying up to Moscow. Seems like a lot of bad stuff to me. Maybe your radio guys should go back to spinning old Brittany Spears singles like Glenn Wreck and Insane Hannity used to do before their gigs with Fake Noise.

      1. CoRev

        Wow! 2slugs, did you miss any of the Dem talking points? Can you cite any REAL evidence for your points?

        BTW, the Trump economy sure is taking off. Anyone of you libs predict this?
        BTW, do you rememvber the days when Cactus was writing his book? One of my complaints then and still is he could not point to any policy decisions/differences to support his contentions. With Trump the policy differences and their effects are clear.

  10. Ed Hanson


    So you got nothing.

    The President is not blatantly racist.
    He does not have a long history of racism.
    Everyone has concern about Russian influence but the buzz is overblown.
    Trump has not obstructed justice.
    The tax reform bill was overdue and thankfully passed.
    China has been moving in with or without the poorly constructed TPP.
    It is good that he followed up on a campaign promise to leave the TPP.
    No chicken involved in the NK problem. It is the result of decades of poor efforts of several presidens who found it easier and politically expedient to kick the can down the road.
    The budget process has been stalled and broken long before Trump presidency. The problem squarely falls on Congress.
    The serious Turkish problem predates Trump, Obama and the EU are mostly responsible.
    Radio guy not a DJ.


    1. 2slugbaits

      Ed Hanson Blah, blah, blah. Deny, deny, deny. Close eyes, hands over ears. Cover eyes, hands over ears. Cover eyes, hands over ears.

      The serious Turkish problem predates Trump, Obama and the EU are mostly responsible.

      What??? Obviously you have no idea what I’m talking about. The incident and Turkish/Moscow threat to US soldiers happened within the last 48 hours. Try getting your news from someplace other than moronic…I mean morning radio and Fox & Friends.

      1. Ed Hanson


        Obama brought us into Syria but then did not have the wherewithall to accomplish goals. Have you forgotten the “red line”? That began and exacerbated the problems.

        Yup, the threat is now. But even you who is closer to information does not know the whole story. My best guess is you are seeing the reaction to a quiet decision by the US to to promote a Kurdish state. Something the Kurds deserve but creating the dangerous situation that is growing.

        Turkey and Erdogan at one time was close to joining the EU. The Europeans pulled out the rug from under the deal.


  11. Ed Hanson


    Durbin is a Chicago democrat. He is cagey and tough. He also does not consider political lies as lies but just part of the game. The most disappointing thing is that Menzie lives close to Chicago and knows this, but also thinks its just part of the game.


  12. noneconomist

    Events include

    San Francisco Chinatown Moving to Bakersfield
    Colin Kapernick Entering Police Academy for Training
    Trump Approval Rating in California Climbs to 30%
    Silicon Valley SchoolS Ban Student Computer and Tablet Use

    Updates to follow

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