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Why Mexico will pay for the wall and not mind doing it

By Michael Knox - posted Monday, 13 February 2017


The border adjustment tax is part of the program designed by Paul Ryan to allow the US to reduce its corporate tax rate to 20%. It was not designed to fund the building of the wall but Mexico will pay this tax and the wall will be built. So if Trump says Mexico is paying for the wall, who are we to disagree?

This should be no problem from Mexico's point of view. China will face more border adjustment tax than Mexico. Germany will face more border adjustment tax than Mexico. Mexico will face the border adjustment tax at the same rate as everybody else. What is there for Mexico to be unhappy about? Even Donald Trump will be happy – maybe.

Footnote:

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There is a broad discussion on exchange rate effect of this improvement in the US trade balance. In theory, an improvement in the US trade balance should push up the $US. We find there is little evidence that this happens in practice.

For example, the Euro Area has persistent trade surpluses. The US has persistent trade deficits. If trade balances were important, then the $US would be weak and the Euro would be strong. In practice, the reverse can be seen to be the case.

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Disclaimer

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk.

This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for USe by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.



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About the Author

Michael Knox is Chief Economist and Director of Strategy at Morgans.

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