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Donald Trump's Mexico tax plan is bad for everyone, including Americans

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I wanted to write about something else today. Anything else.

But the new US President can't keep himself out of the news, and the economic consequences are potentially too big to ignore.

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The latest news (at the time of writing, but given the way Donald Trump tweets, this could be old hat by the time you read it) is that the US is poised to put a 20 per cent tariff on everything coming from Mexico, to help pay for the wall between those two countries.

President Trump, we need to talk. Now, I understand you might have missed my article on why Vegemite's return to Australian hands was good for the soul, but not necessarily for the national wallet -- you have been busy after all, with all of that tweeting.

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But I have to try again. You know who that 20 per cent tariff is going to hurt? Yes, yes, you'll probably plunge many thousands of Mexicans into poverty, and we know you don't care about them. No, I'm talking about other people, the ones in your electorate. Whacking a 20 per cent tax on imports makes those goods 20 per cent more expensive. And you know who's going to be paying 20 per cent more? Yes, your countrymen and women.

Oh sure, maybe the cars, food, machinery, oil and the rest can be sourced from somewhere else, but then, what if they don't play ball? Well, you can tax them too. Sure you'll bring the jobs home -- because no-one will be able to export to the USA, given those exorbitant tariffs, but Americans will need those jobs -- and more -- just to pay for the rampant inflation.

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Donald -- if I may call you Donald -- Australia has some first-hand experience here. Our car industry was beset by high prices and questionable quality back in the day. But our governments wised up, lowering tariffs to increase competition. You know what happened? Local quality improved. Imported cars got cheaper. Sure, we lost the car industry in the end, but we're paying much less for them now than we would have. And, as a country, we've absorbed those lost jobs into new industries and new sectors. Higher education is booming. Tourism is doing wonderfully.

By keeping tariffs low and doing free trade deals, we sell more of our stuff overseas, we buy more stuff from overseas, and our standard of living is higher. Sure, we could try to build our own planes, cars and phones in Australia, but the prices would be higher and the quality worse. We'd have fewer tourists and students, sell less wheat, wool, and iron overseas.

Made In Australia wouldn't meaningfully increase the number of jobs in the country (for every 'made here' job we add, we'd probably lose an 'export to over there' job in the process) but it would meaningfully increase the prices we'd pay.

Mr. President, there are few, if any, economists who actually think your plan will work. At least, not over any timeframe that matters. Creating some new jobs, cutting some ribbons at manufacturing plants, and posing in hardhats (I'm looking at you, Australian Prime Ministers and Premiers) might make for good photo opportunities and might -- just might -- get you re-elected. But the legacy of such policies are very likely to hurt your economy for years, and maybe decades.

Of course, I probably should just shut up. After all, even if you read this you probably won't care. And, frankly, if you abandon the huge advances in global trade that have been made over the past few decades, that simply leaves the board open for the rest of us. While you put up physical and metaphorical walls, the rest of the world will simply be more inclined to deal with each other.

My enemy's enemy is my friend, after all, right? Oh, we're still friends, but when it comes to trade, more and more countries (and companies) will be forced to go elsewhere.

Going to slap a tax on US companies that take jobs offshore? No problem. That means companies which are already based outside the US will have access to cheaper labour markets, and so will be able to undercut US producers in both the American market and abroad. Going to mandate 'American made'? That's okay, but so will foreign governments, meaning less business for your companies trying to sell overseas.

You can see how this ends, right? At best (for us), we're driven into the hands of your national competitors -- we'll all deal with each other. At worst, the rest of the world retaliates, and consumers the world over all pay more as the efficiencies of global markets are unwound.

I get that you're trying to revitalise parts of the US economy. And I can see how the untrained eye might think that simply whacking taxes and bans on things is a solution. And why much of the US electorate might buy it.

But your efforts, however intended, are likely to be bad for the US economy, and either good, neutral or bad for the rest of us. Donald, you once wrote a book called The Art of the Deal, so you should know: whichever way you cut your current plans, for Americans at least, it's a pretty bad one.

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Scott Phillips is the Motley Fool's director of research. You can follow Scott on Twitter @TMFScottP. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).