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President Trump has proposed a 20% tariff on some Mexican imports to the US. Is there a good way to estimate the incidence of this proposal between the Mexican producers and American consumers, as well as the deadweight losses? Perhaps some analyses have already been done?

I know it's hard since there are no real details on the proposal.

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  • $\begingroup$ WTO agreement does allow tariff to be imposed on certain goods, under very specify condition, e.g. if there is proof of dumping. Mexico can simply retaliate by finding US export to Mexico that can be barred/impose tariff. $\endgroup$ – mootmoot Apr 13 '17 at 15:35
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A working paper on this question was just published, albeit the document is in Spanish. The abstract is in English though. The report is solely concerned with inflation. Here is the abstract:

The goal of this research is to simulate the possible effects of the 20% increase in tariffs on the Mexican economy. The price model used is based on a general equilibrium linear model. With this price model, the estimate of the impact of the effects of a US tariff increase of 20% on the Mexican economy is roughly estimated, simulating this increase on prices in the rest of the world. In this way, it is possible to calculate the effects on consumer prices and welfare represented in this case by the CPI. The main result shows that the impact of the increase of the prices of the rest of the world to the increase of the tariffs in the United States on the CPI is inflationary with an increase of around 4%.

The main (and only) result of interest is shown in "Tabla 1". It indicates the increase in final prices for different industries. Remarkable are the cases of Manufacturing ("Industrias Manufactureras", Ṇ̣o 5), with 8.2%, Energy (No 3) with 4.88% and Transport (No 7), with 4.3%. Housing (No 10) and "Corporative services?" (No 12) are the least affected (0.5%).

Regarding the methodology, it is based on a price model of the Social Accountability Matrix. To me, it does not seem like a very through exercise, and it is not based on a behavioural, general equilibrium approach, but more of an accounting exercise. Still, it seems to be the only study available at the moment..

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Due to the tariff, the supply of any product being imported from Mexico to the U.S will shift back. This would mean that prices of goods will increase in the U.S itself and most of the tariff will eventually be paid by U.S citizens who buy the goods. As the price increases, consumer surplus decreases and the market will not be at equilibrium, therefore a deadweight loss will be present.If the selling price of a product is 10.5$.The new selling price is 12. There will also be a deadweight loss as the society will not receive the quantity it demands.

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  • $\begingroup$ I agree that most of the price increase would be borne by US consumers, and that the deadweight loss will be positive. But I'd like an idea of the magnitude of both. $\endgroup$ – Charles Jan 30 '17 at 17:32
  • $\begingroup$ @user11936 Surely the burden of the tax, for any type of good, will depend partly on whether the US can (and its trade policies will permit it to) import similar goods at similar or only slightly higher prices from other countries? The burden of tax on manufactured goods might be quite different from that on vegetables. $\endgroup$ – Adam Bailey Feb 1 '17 at 9:47
  • $\begingroup$ From what I heard if the tax is that high it could have dramatic effects for the whole Mexican economy. In that case partial equilibrium would probably not be the right framework $\endgroup$ – Ululo Mar 3 '17 at 2:03

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