During his first term, Trump used tariffs to punish countries like China for what he called unfair trade practices. Now, he is using the latest measures to stop the flow of drugs and people crossing the US border without documents. Here is a way of escape.
Trump said that on his first day as president, he would sign an order imposing a 25% tax on all imports from Mexico and Canada and an “additional” 10% tariff on goods from China.
It is, however, true to custom for Donald Trump to declare tariffs and demand payment from trading partners weeks before taking office. His victim of choice was always going to have a random character. Nevertheless, Canada, Mexico, and China have the ability to avoid a trade rivalry.
Trump’s tariff policies against Canada, Mexico, and China
During his race for president, Trump said that he would put tariffs of 60% or more on goods coming from China and said he might put a tariff of 1,000% or more on vehicles coming from Mexico.
When the president-elect made his speech, he said that taxes would stay on goods from Mexico and Canada until the “invasion” of drugs and refugees finished.
He also said that Until Beijing did something to stop the flow of fentanyl into the country, which kills tens of thousands of people every year, the tariffs would be put on Chinese goods.
Trump said in a post on his social media platform Truth Social, “Both Mexico and Canada have the absolute right and power to easily solve this long-simmering problem,” He added, “We hereby demand that they use this power, and until such time that they do, it is time for them to pay a very big price!”
Some Trump supporters have said that the president-elect sees the threat of tariffs mainly as a bargaining chip that he will use in future talks with other countries.
Mexican President Claudia Sheinbaum has not taken Trump’s plan for her country lightly. She has cautioned Trump about severe economic consequences for both nations stemming from tariffs and proposed potential retaliatory measures in response to his threat of sweeping 25% tariffs on Mexico and Canada.
“To one tariff will follow another in response, and so on, until we put our common businesses at risk,” Sheinbaum wrote in a letter to Trump, which she read at a press conference and intended to submit later in the day, warning that tariffs would bring inflation and job losses in both countries.
Soon after her warning, the Mexican peso depreciated sharply against the US dollar. As of September, Mexico has emerged as the United States’ leading trade partner, accounting for 15.8% of total trade, with Canada trailing at 13.9%. The United States stands as Mexico’s main trading partner.
Events that undermine tariff effectiveness
When trying to figure out the direction of policy in the middle term, looking at high-frequency market reactions can be very misleading. Trump can change his mind at any time. Still, it’s interesting that buyers wanted to buy the dollar instead of selling it. This is, however, expected since taxes tend to make the exchange rate go up.
It’s possible that Trump’s other stated goal for tariffs—to close the US deficit—will not be met. The dollar fell a little after the president-elect said over the weekend that hedge fund manager Scott Bessent would be his choice for Treasury secretary.
This may have been because people thought Bessent’s nomination would lower interest rates than expected. After all, he attacked the independence of the Federal Reserve.
Richard Nixon used IEEPA’s precursor legislation, the Trading with the Enemy Act, to impose an across-the-board 10% tariff on imports in 1971 amid the collapse of the Bretton Woods. The policies led to the instability of floating currencies, as the U.S. dollar sank by a third during the 1970s.
What strategies do Canada, Mexico, and China have at their disposal, along with other trading partners like the EU, as they prepare for potential coercive measures? The most immediate strategy appears to be somewhat optimistic in addressing immigration and fentanyl, potentially enabling Trump to frame his approach as a success, even prior to his transition from Joe Biden.
In short, countries that fall under Trump’s tariff radar need to offer something to the US to survive at a negotiation table. One of Trump’s more effective management moments during his first term was European Commission President Jean-Claude Juncker’s promise that the EU would buy soybeans and liquefied natural gas in exchange for Trump refraining from imposing vehicle tariffs.
Those pledges were useless – the commission president lacked such authority — but Trump could claim triumph.
Another approach for trading partners would be to assess whether the opposing dynamics within the US framework can effectively make their presence felt. In the early days of his presidency, Trump hovered on the brink of a complete withdrawal from Nafta.
However, he was ultimately swayed by the counsel of his agriculture secretary, Sonny Perdue, and commerce secretary, Wilbur Ross, who warned that such a move could have detrimental effects on farmers and border states. Ultimately, he opted for a relatively modest renegotiation. Any hint of a sharp spike in gas prices or a significant downturn in the stock market could sway his decision.
For now, the most prudent course of action for the three nations singled out by Trump may be to adopt a wait-and-see approach regarding the actual effects of the tariffs. Economic modeling in the early days of the Trump administration indicated that Canada’s retaliatory measures against Trump’s tariffs could exacerbate the damage to its economy.
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