President Trump’s administration initiated a trial balloon last week that, if acted upon, could have a major impact on the supply and demand equation for silver and, in turn, silver prices. In discussing ways to pay for the border wall, the president’s team proposed imposing a 20 percent tax on all imports to the U.S. from Mexico. 1
Import Tax on Mexican Silver
White House Press Secretary Sean Spicer suggested the import tax after a meeting of Republicans in Philadelphia. Spicer stated in part, “…using comprehensive tax reform as a means to tax imports from countries that we have a trade deficit from, like Mexico, if you tax that $50 billion at 20 percent of imports…we can do $10 billion a year and easily pay for the wall just through that mechanism alone.”
Neither details nor timetables have been presented, but the idea has generated a great deal of discussion. House Speaker Paul Ryan talked about the feasibility of the proposal, indicating most countries do tax imports more heavily than the U.S. This would allow a new focus on such imports, though the only country mentioned now is Mexico.
While there was a great deal of reporting on the proposed tax, one commentator pointed out that this may be more in line with President Trump’s typical negotiating style. Specifically, he tends to throw out extreme ideas and then move back to a more acceptable solution. At the moment, indications are that there may well be a new border tax, but not as high as the discussed 20 percent.
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Implications for Silver Demand & Prices
It is worth noting that Mexico remains the world’s top silver producer, and the United States is one of its biggest customers. In fact, the U.S. imported 3,440 metric tons of the white metal in 2015, and the majority (2,850 tons) of that was from its southern neighbor. The production of Silver Eagles for the U.S. Mint alone consumed nearly 48 million ounces in 2015, while the total U.S. production of silver was only 35 million ounces. 2 An increase in the taxes on the same quantities of imported silver will have a direct impact on silver prices. 3
Compounding this issue is the current gap between silver supply and demand. Silver demand has exceeded its production for years, and any disruption in new supplies could affect the markets over both the near and long term. 4
The potential of a tax on imports bears watching. In the meantime, U.S. and global consumers of silver and Mexican producers will be evaluating their options should such a tax be imposed. 5 However, silver prices today will likely be more favorable to investors than after the implementation of such a tax.