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Explainer: Can USMCA Pay for Trump’s Border Wall?

Posted January 15, 2019


In a word: No. The idea is obviously a little far-fetched given that most tariffs between the U.S. and Mexico were waived nearly 25 years ago through the original free-trade agreement, but it may be instructive to work through why that’s the case, as the flawed reasoning underpinning Trump’s argument is perhaps illuminating enough to merit closer examination.

Background


Building an “impenetrable” wall along America’s southern border, and having Mexico pay for it, was the signature plank in Donald Trump’s 2016 platform – a pledge that he made more than two hundred times over the course of the campaign.

In the announcement of his run for office before a crowd gathered in the lower level of the Trump Tower lobby, the future president said: “I would build a great wall, and nobody builds walls better than me, believe me, and I’ll build them very inexpensively, I will build a great, great wall on our southern border. And I will have Mexico pay for that wall.”

When pressed to explain how this would happen after Mexican President Enrique Peña Nieto soon made clear his country would “of course” not be footing the bill for a “big, beautiful” border wall with a “one-time payment” of billions of dollars, Trump said he would “take it from out of just a small fraction of the money they’ve been screwing us for over the last number of years.” And so began the first of many alternative proposals to compel Mexico to fund the wall.

In addition to threatening a border tax of some kind on companies doing business in Mexico, various unconstitutional, impractical and/or illegal ideas floated in a campaign position paper on immigration included: deducting costs from foreign aid (estimated at just $320 million); impounding remittances from undocumented workers; increasing a wide range of border fees; and even imposing tariffs on Mexican imports under NAFTA. Eventually, these were simply boiled down into a catch-all vow that Mexico would pay “in one form or another.”

Once elected, Trump came up with new explanation for how his ever-changing wall might conceivably be funded, telling a gathering of Republican lawmakers that “We’re working on a tax reform bill that will reduce our trade deficits, increase American exports and will generate revenue from Mexico that will pay for the wall if we decide to go that route.”

In a wide-ranging interview with the Wall Street Journal roughly a year later at the start of his second-term, Trump expanded on this notion, suggesting that if his administration was to make a “good deal” renegotiating NAFTA, “I’m going to take a small percentage of that money and it’s going to go toward the wall. Guess what? Mexico’s paying.” As noted by Vox at the time, it was unclear what “that money” was in the context of NAFTA or how he would go about taking it.

Trump’s USMCA Argument


As can be seen here, though appearing to suddenly come out of nowhere, the latest argument that Trump has adopted during the fight leading up to and during the current government shutdown has actually been evolving for quite some time.

The assertion that Mexico will pay for the border wall “indirectly” via the new US-Mexico-Canada trade deal was first made by Trump during a during a contentious White House meeting last month with Chuck Schumer and Nancy Pelosi. The president reportedly told the Democratic congressional leaders that “USMCA will bring so much money into the U.S. that it would be almost as if Mexico paid for the wall.” Despite unconvinced Democrats saying afterwards that “the proposal doesn’t make sense, and it’s unclear how it would work,” in a subsequent tweet, Trump insisted the revamped trade agreement with Mexico (and Canada) “is so much better than the old, very costly & anti-USA NAFTA deal, that just by the money we save, MEXICO IS PAYING FOR THE WALL!”

As a government shutdown over nearly $6 billion worth of funding for his border wall loomed large, Trump’s claims prompted an understandable question from one reporter during a press briefing the following week. Asked why the president was looking to tap the American taxpayer for additional monies for a wall that he’d promised Mexico would pay for, White House Press Secretary Sarah Huckabee Sanders said: “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.”

At various staged events and photo-ops last week, with many parts of the government now shuttered or staffed by federal employees working without pay, Trump continued to assert that the wall would “pay for itself” thanks to the USMCA. “We will be taking in billions and billions of dollars more money for the United States, including jobs, including companies that won’t be leaving us anymore and going to Mexico, and in some cases, Canada, to a lesser extent,” Trump said. “In fact, what we save on the USMCA, just with Mexico, will pay for the wall many time over just in a period of a year, two years, and three years,” he claimed, before telling reporters that he viewed it “absolutely” as Mexico paying for the wall. “And that’s fine,” he added.

Facts About the USMCA and the Wall


Obviously, there is no specific provision in the USMCA stipulating that Mexico will pay for any kind of border wall. As Kenneth Smith Ramos, who served as Mexico’s chief NAFTA negotiator under former President Enrique Peña Nieto’s administration, snarked on Twitter last week: “Trump says the #border #wall will be paid for through the new #NAFTA (USMCA). That’s a chapter you will NOT find in the new Agreement, simply because it does NOT exist #MexicoWontPay#factcheckingplease.”

It should also be noted that the USMCA isn’t even in force yet and must first be ratified by lawmakers in a three countries, an inconvenient reality Trump himself reluctantly acknowledged at a roundtable on border security in McAllen, Texas. In the U.S., both Democrats and Republicans have already signalled objections to elements of the deal so its approval is by no means a certain thing, and even if it makes it through the U.S. Congress and is eventually endorsed by Canada and Mexico, it won’t go into effect until 2020, at the earliest.

Assuming the trade pact is ratified by all three countries, the question then becomes whether the USMCA can raise the enormous sums of money required to fund Trump’s roughly 3,060 km long border wall. The structure has variously been estimated to cost anywhere from as little as $15 billion by Trump’s extemporaneous reckoning to $25 billion according to a White House immigration plan (although a report prepared by the Democratic staff of the Senate Homeland Security and Governmental Affairs Committee estimated the cost could soar to nearly $70 billion — not including the substantial costs and legal resources required for land acquisition).

Being essentially just a fairly minor update of NAFTA, most economists don’t expect Trump’s “great new trade deal” to boost economic growth anywhere near what the White House has projected, or indeed think that it will lead to the kinds of changes that most people will even be able to notice. Just as Trump and other politicians (mostly on the left) have often vastly overstated the negative impacts of NAFTA, so too is the president now wildly exaggerating the USMCA’s potential benefits, which in actuality economists such as HSBC’s Ryan Wang say “should be fairly small and will likely play out over a long period.”

According to Phil Levy, a senior fellow at the Chicago Council on Global Affairs who served as a senior economist for trade under President George W. Bush, Trump’s claim that the USMCA will result in “billions and billions of dollars more money” flowing into the U.S. Treasury is “extremely implausible.” Quite the contrary, says Lori Wallach, director of trade policy for advocacy group Public Citizen, who noted in a statement that the deal was likely to generate no additional government revenue whatsoever, “given it cuts the very few remaining tariffs, not raises them.”

Fundamental Misunderstandings


Many of the problematic aspects of Trump’s USMCA funding the wall argument appear to stem from the president simply not understanding how trade works. This has been written about extensively, but was perhaps most clearly stated in a column for the Wall Street Journal, where the Hoover Institution’s Tunku Varadarajan shares some observations by Dartmouth professor Douglas Irwin, a prominent trade economist.

Mr. Trump may be the first openly protectionist president since Hoover, but what Mr. Irwin finds most frustrating about him is that “he never really defines what a ‘better’ trade deal is. His judgment of trade comes down to the trade balance, which he uses as a sort of ledger, as a businessman would, rather than think more broadly about the national economic impact of trade.” It is impossible for every country to run a trade surplus, but “Trump thinks about trade in these zero-sum terms, about whether there’s profits or losses, and he views exports as good and imports as bad.” ...He fails to see that in international trade, imbalances “aren’t an indication that one country is beating another, or that one is ‘winning’ and the other’s ‘losing.’” Mr. Trump’s rhetoric and vocabulary are “not the way economists think about trade at all.”

Trump’s zero-sum worldview helps to explain his belief that Mexico has been “screwing” the United States; not because of any unfair conduct or malign practices, but simply because it currently enjoys a roughly $70 billion surplus in two-way trade. Similarly, it accounts for Trump’s claim that the USMCA will somehow “save” the U.S. tremendous amounts of money – presumably, money that was previously being “lost” to Mexico – if the deal successfully manages to narrow the bilateral trade gap.

Another thing Trump appears to misunderestand is that tariffs are essentially just another form of taxation. Last year, he claimed that “Because of Tariffs we will be able to start paying down large amounts of the $21 Trillion in debt that has been accumulated, much by the Obama Administration, while at the same time reducing taxes for our people.” Aside from the fact that import duties are trivial share of federal revenue, or as one economist put it “loose change in the fiscal sofa cushions,” Trump’s deeply confused remark not only clearly demonstrates that he doesn’t appear to grasp that tariffs and taxes are essentially interchangeable terms, but also that U.S. importers and American consumers are effectively paying for them – and not, as he seems to believe, the foreign countries against whose exports they are levied.