Effects of Trump’s tariff war

On Feb. 1, President Donald Trump announced his plan to impose a 25 percent tariff on all goods coming from Mexico and Canada (except Canadian oil and gas which would be slapped a tariff rate of 10 percent). He also announced a 10 percent tariff on Chinse imports on top of those already levied during his first term. This will effectively accelerate the average tariffs on Chinese goods to 20 percent.

Trump’s tariff spree is motivated by four objectives. First, to reduce US trade deficits with its trading partners which, as of end-2024, amounted to $918.4 billion. Second, to raise revenues through tariff collection. Third, to compel manufacturers affected by tariffs to move their production  to the US. Fourth, to compel Canada, Mexico and China to bend to his will.

How will the tariffs affect China, Canada and Mexico?

Much to Trump’s chagrin, the impact on China will be minimal. US-China trade has diminished significantly since Trump imposed tariffs during his first term. China has successfully diversified its export markets since 2017, effectively weaning its dependence from the US. The Economist magazine forecasts the impact on the Chinese economy to be minimal, to the tune of 0.3 percent of GDP over the next few years.

Canada and Mexico will be impacted in a more substantive way. Since 1993, tariffs between the three economies have been virtually nil, thanks to NAFTA and later, the USCMA. This opened the way for manufacturers to create supply chains spanning the three countries whereby components cross borders several times before the finished product is rolled out. This is especially true for autos, aerospace products and heavy equipment. Trump’s tariffs will upend these supply chains, making the finished product more expensive. The added cost will be passed on to consumers.

The effect on the Canadian and Mexican economies will be significant. The Peterson Institute for International Economics (PIIE) estimates that Canadian and Mexican growth rates will slow down by 1.5 percent over the next five years. Meanwhile, inflation will increase by 1.7 points in Canada and 3.0 points in Mexico.

America will be the biggest loser

While Mexico and Canada generally import non-essential goods from the US like cars, clothes and footwear, the US imports vital raw materials from Canada and Mexico like   industrial components, construction materials, fruits and vegetables, steel and aluminum, gas and oil, etc. A tariff will make these imports more expensive, hitting America in two ways – higher food prices for American households and higher cost of American-made goods for export. The former stokes the flames of inflation while the latter erodes American global competitiveness.

The US depends on Canada for electric power, particularly in the northern states of  New York, Minnesota, Ohio, Pennsylvania and Michigan. With the intended 25 percent retaliatory tariffs imposed by Canada, the cost of power in these states are seen to increase by $100 per month for the average household and $3,750 for an typical factory that consumes one million kw/h per month. Again, the spike in energy cost will drive inflation. The PIIE forecasts American inflation to top eight percent upon the imposition of these energy tariffs.

As to reducing America’s trade deficit, the first round of tariffs against China in 2018 proved that tariffs were ineffective in doing the job. On the contrary, it even increased  the deficit. When tariffs were imposed in 2018, American imports from China fell by 16 percent. But American exports to China also decreased by 11 percent due to retaliatory tariffs. The net effect was a reduction in America’s trade deficit by $51 billion. However, America imported more  goods from Southeast Asia, Japan and Korea. In the end, America’s aggregate deficit spiked to $99.8 billion the following year. Tariffs failed to reduce the trade deficit as businesses simply diverted their source of  imports.

As far as compelling manufacturers to set up factories in America, yes, a number of factories like Samsung and LG (formerly manufacturing from China) did so following the first round of tariffs on China. But its effect on the American economy was minimal. This is because America’s unemployment rate was already low. Today, the unemployment rate stands at 4.1 percent, which is nearly full employment. Tariffs is the wrong prescription to address American’s core problem, which is rising prices.

In terms of raising revenues through tariffs, the experience in 2018 proved that tariffs  failed to do the job either. While America expected a windfall of $87.5 billion, the  collection realized was only $25 billion. Again, this is because importers diverted their suppliers from China to other countries.

Bullying tactic

Trump’s tariff threats are meant to bully Canada and Mexico into submission. For Canada, it is to cede its sovereignty to be America’s 51st state. For Mexico, it is to curb illegal immigration and the flow of fentanyl, among others. But Trump’s tactic seems to have backfired. The two neighbors have responded with painful retaliatory tariffs. Canada announced a 25 percent tariff of $155 billion worth of American goods while Mexico announced a five percent to 10 percent levy. This led Trump to back-pedal on his tariff threats two times in just two weeks.

Tariffs have also pushed Canada and Mexico to forge trade and tourism deals with each other and directly with the EU and Indo-Pacific economies, all of which by-passed the US. A countrywide boycott of American products has also started, not only in Mexico and Canada but also in counties that detest Trump’s behavior. The effects of all these are still unknown but could be catastrophic for American businesses.

For its part, China retaliated with tariffs targeting the farming sector, the core of the MAGA movement.

Tariffs proved to be a bad idea during Trump’s first presidency. It is a wonder why Trump is employing the same strategy again.

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Email: andrew_rs6@yahoo.com. Follow him on Twitter @aj_masigan