Voters like to complain that politicians either forget their promises upon election or water them down due “to unforeseen circumstances” which provide them wriggle room. So then, why do so many people profess outrage, surprise and disappointment when someone like Javier Milei or Donald Trump actually begin to carry through on these promises exactly the way they said they would during campaigns? It seems upon closer reflection that everyone from government officials to voters try to rationalize these promises as overblown, simplistic ‘populist’ rhetoric meant to win over constituencies which could be then rationalized away when all of the posters and bunting come down.
It’s a cynical yet understandable viewpoint, purporting to believe that any figure can be co-opted into the establishment or have their policies defanged by special interests or the bureaucracy.
Yet, as he laid out during numerous presidential campaign speeches and interviews barely a fortnight into his new administration, Donald Trump has placed significantly large tariffs on America’s three biggest trading partners—raising the spectre of a worldwide trade war. With a flurry of executive orders signed on February 1st, he initiated tariffs of 25% on imports from both Canada and Mexico, as well as added levies of 10% to Chinese imports. These promised actions will still represent nothing less than a profound shock to the interconnected global economy. Prices will likely be driven up, weigh on growth and sow uncertainty for businesses. Moreover, they are likely to be just Trump’s opening salvo, who is itching to implement tariffs that are both more aggressive (i.e. 100% on the BRICS countries) and more global in nature.
Trump’s announcement of the new duties should unequivocally erase any doubts about his resolve to take a protectionist hard line on trade, heedless of warnings from businesses, diplomats and economists about any potentially negative fallout. In a fact sheet explaining the orders, the White House said access to the American market is a privilege, and that tariffs are a “proven source of leverage for protecting the national interest”. Hoping for some rationalization, there had been reports in recent days that the American president might delay the tariffs or opt for a more gradual approach. High-ranked Canadian and Mexican officials shuttled back and forth to Washington, making the case to both administration and legislative officials that tariffs in North America, one of the world’s most tightly integrated trading zones, would be utterly counterproductive and violate both the original NAFTA and the subsequent USMCA agreements.
As his wont went encouraged not to do something, Trump brushed aside the concerns, opting for harsh, ‘shock and awe’ - inspired wide-ranging levies, with only a minor carve-out for oil and gas from Canada, which will for now be limited to a 10% tariff rate. The 10% tariffs on China were milder than the 60% level that he had originally threatened on the campaign trail, but they come on top of tariffs of 25% that already cover much of America’s previous trade with China, and they may well serve as just the opening barrage in a renewed and more protracted trade clash between the two giants. Sensing that China’s economy has been weakened by its shaky real estate industry and decline in consumer spending, Trump may well be looking at this moment as an opportunity to ‘pull a Reagan’ and further damage the Middle Kingdom’s fiscal strength in an analogous way to the 4oth president’s goading of the Soviet Union into spending itself into oblivion.
It's really no surprise, given Trump’s zero-sum worldview. He does not abide by the ‘grey area’ compromises inherent in what he sees as the Establishment’s orthodoxy of compromise.
Given the precedent of Trump’s oft-declared love of tariffs as well as the trade disputes that marked his first run in the White House, these latest actions may seem to be par for the course. In fact, they appear to be more extreme than any of his previous actions. During Trump’s first term, China was the main target of his tariffs, which ended up applying to about $370bn-worth of Chinese imports. This new round of tariffs covers roughly $900bn-worth of imports from Canada and Mexico. The additional tariffs on China extend to products such as computers, toys and smartphones, had been excluded from extra duties during Trump 1.0 in order to protect consumers.
This time the tariffs will also hit the economy with as much sudden impact as a locomotive through Jello. Trump 1.0 saw him build up tariffs over a couple of years, using statutes that provided months-long notice periods to affected business sectors. The February 1st tariffs will go into effect on February 4th. Trump invoked the International Emergency Economic Powers Act, a law that gives the White House broad authority to impose tariffs so long as it declares there to be a national emergency. The president has said the flow of illegal migrants and drugs, especially fentanyl, across America’s borders constituted an extraordinary threat, and that the tariffs would be maintained until the crisis is alleviated.
From a logical, political and economic perspective a trade war is no solution to such complex problems, being akin to using an assault rifle to open a walnut. Harming Mexico’s economy may make the country less, not more, stable. And, as putative Canadian prime minister Mark Carney has pointed out, just 1% or so of America’s seizures of fentanyl and encounters with illegal migrants are on its northern border. It’s a histrionic reaction, even by Trumpian standards.
The reality is far grubbier and also more foolish: Trump has long held the belief that tariffs benefit the American economy. First, he thinks – not incorrectly -- they will generate enormous revenues for the federal government, letting it cut taxes. But the new tariffs on Mexico, Canada and China may bring in just $110bn for the federal government, or about 2% of its overall tax income, according to the Tax Foundation, a think-tank. At the same time, much the tariffs’ costs will be borne by American consumers and businesses. From avocados to tomatoes and cars to crude oil, Mexico and Canada are major suppliers to America. The prices of these products, and many more, are likely to rise in the coming months. As of this writing the Canadian government has already responded with a retaliatory 25% levy on American goods worth $30 billion starting Tuesday, February 4th with an additional $125 billion in duties on American products will follow in 21 days, allowing Canadian consumers and supply chains to find alternatives. Mexico is sure to follow with similar measures.
Secondly Trump believes that tariffs will encourage firms to manufacture more products in American factories. Yet the US alone will never be as efficient as the regionally integrated production networks that have grown up through more than thirty years of free trade between America, Canada and Mexico. Together they are home to 500 million people, 50% bigger than America by itself. The countries each bring different strengths to the current relationship: Canada has vast mineral wealth; Mexico offers lower-cost labour. Exemplifying this the dense flow of goods is the closely knit automobile industry: roughly about 50% of auto-part imports in America come from Canada and Mexico, and some 75% of auto-part exports from America go to Canada and Mexico. Shares in the big three Detroit-based automakers—General Motors, Ford and Stellantis—all dropped downwards on January 31st when Trump’s press secretary reinforced tat tariffs were imminent. The coming days are likely to bring more turmoil in financial markets as the US administration has more than hinted Canada’s and Mexico’s responsive actions could in turn trigger even higher and more wide-ranging tariffs.
For all of this turmoil, Trump is actually correct that America does have leverage in trade clashes and the negative economic impact on Canada and Mexico would likely be more damaging than that on the US’s for those markets are smaller and less diversified in trade partnerships: their very dependence on the US as a primary market is a two-edged sword. American exports are worth roughly 20% of Canada’s GDP and 30% of Mexico’s. By contrast, American exports to Canada and Mexico combined are worth just 3% or so of the US GDP. It’s estimated by think tanks and economists that tariffs of 25% could shrink the Mexican and Canadian economies by 1-2% over the next few years, plunging both nations into recessions. With just these current measures, the growth drag in America will be closer to 0.2%.
Things could get worse before they get better Both Mexico and Canada face Hobson’s choice: if they hit America with higher and higher tariffs, they will compound the damage to their own economies and invite compensatory retaliation. If they do nothing, they will look weak. All the while the Trump administration is already planning next steps. Europe is in the president’s crosshairs. He has also talked of general levies on oil and gas. Ultimately, unless restrained by negative effects, he wants to slap a universal tariff on all imports into America. Although the new tariffs on Mexico, Canada and China are bad enough by themselves, they are likely a preamble of the disruption that the 47th American president intends to wreak on the international trading system in the months to come, and that will have profound impacts on every trading nation.
Given the constraints of a second term (i.e. a president has about two years to enact his/her agenda before mandatory congressional elections and, providing their party wins or retains control of the legislative bodies of the Senate and House of Representatives, one more year of relative freedom before their final 365 days are consumed by the contest to succeed them and thus risk lame duck status), Donald Trump is in a hurry. And in his haste, he has evinced no averse reaction to breaking things.
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