U.S. President-elect Donald Trump has already waded into his future trade wars before taking office. His proposal of a steep import tax on all products from the country’s top trade partners gives a preview of exactly how his zero-sum approach to economics could quickly become zero-benefit for businesses and consumers.
Trump, who vowed during his campaign to slap tariffs on everything that moved, said on Nov. 25 that he would, on his first day in office, put a 25 percent duty on all imports from Canada and Mexico—the United States’ two biggest trade partners, all bound together by a trilateral, tariff-free trade deal that Trump himself wrote. For good measure, Trump also threatened a 10 percent tax on all imports from China. His demand was for those countries to take immediate steps to curtail U.S.-bound deliveries of drugs and migrants.
The response, at least from the country most directly targeted, was pointed: Mexican President Claudia Sheinbaum told Trump in a letter, “Migration and drug consumption in the United States cannot be addressed through threats or tariffs,” and vowed the same kind of retaliation that the European Union and China have already promised if Trump makes good on his threats. Canadian Prime Minister Justin Trudeau reportedly spoke with Trump sometime after he posted his statement online; Ontario Premier Doug Ford compared the threat to “a family member stabbing you in the heart.”
There are two ways to consider Trump’s latest threats of tariffs, trade wars, and economic friction. The president-elect’s backers view his threat of tariffs as a clever way to force China, Canada, and Mexico to come to grips with two things he considers primordial: drugs and immigration. Those folks believe that Trump will not have to implement the tariffs because those countries will somehow overhaul their vigilance and enforcement of two of the thorniest questions in cross-border relations.
Alternatively, given that Trump has called tariff the “most beautiful word,” he could actually do what he just said he was going to do, as he has done in the past. Given that the combined trade of the United States with those three countries is around $2.5 trillion a year, with a lot of interconnected supply chains and a deep, decades-old interdependence that could not be jury-rigged on the fly, such a move would be economically devastating.
Prices in the United States—Trump ran in part on fixing the problem of that runaway 2.5 percent inflation—will go up, because whether it is Canadian lumber, Canadian oil, Mexican produce, or perhaps most importantly, all of the many components that go into making a car or a light truck, all of it would cost more than it did before.
The charitable view of Trump’s tariff threat is that it is just silly and would be ineffective, as his previous four years of hectoring China over trade matters and fentanyl achieved very little. The uncharitable view is that it would be silly and catastrophic.
Mexico is the biggest source of U.S. agricultural imports and a big outlet for U.S. exports, as well. The problems with a neighborly trade war are many, and they hit close to home.
“The idea that we are going to have a guacamole tax on day one, right before the Super Bowl, is nonsensical,” said Scott Lincicome, a trade expert at the Cato Institute in Washington.
The first problem for Trump to do what he said he would do is that the United States, Canada, and Mexico have one of the world’s biggest free-trade agreements, the USMCA, or NAFTA 2.0, that Trump himself undertook and which went into effect in 2020.
The proposed tariffs are “definitely a violation of the basic USMCA commitment to charge zero tariffs,” said Simon Lester, a trade lawyer who worked on NAFTA and USMCA issues for years. Trump could invoke the national security exception in the agreement, as he did years ago, to raise taxes on imported steel and aluminum, but that would just trigger a dispute settlement process, which would take longer to play out than the inevitable Mexican and Canadian retaliation would, Lester said.
There are problems even with using that national security exception: It would require an iron-clad executive order, potentially publishing notices in the federal register, and maybe a declaration of a national economic emergency. Social media posts are not policy.
“On the procedural issues, there are so many hurdles and gray areas,” Lincicome said. “I don’t expect those tariffs to be implemented.”
Regardless of the more mainstream names picked for key positions in Trump’s economic braintrust, such as hedge fund manager Scott Bessent to run the Treasury Department, many in Washington don’t think that will be a check on Trump’s anti-trade tendencies.
“Trump loves tariffs, and there will be tariff threats and maybe even tariffs,” Lester said.
The stock market seemed to take the tariff threats with a grain of salt: The Dow Jones industrial average, the blue-chip index, barely wobbled. The U.S. dollar hardly gained against either the Chinese renminbi or the Canadian loonie; the Mexican peso’s slippage against the dollar could be for any number of reasons.
But, given that Trump did campaign on the explicit promise to raise taxes and impede trade, what if they’re wrong?
One of the biggest threats to the economies of the United States, Canada, and Mexico would come in the automotive sector. The original NAFTA, by breaking down trade barriers among the three North American countries, set the stage for an integrated auto industry where bits of a car or truck are made thousands of miles apart. This is big business: Automaking accounts for about 11 percent of all U.S. manufacturing and 5 percent of all U.S. private sector jobs, not even counting all the corollary and related jobs the sector provides.
Trump’s revised USMCA made the relationship between the automotive sector and regional trade even clearer, especially by mandating that roughly 75 percent of all cars and trucks be sourced locally. One way to avoid the cost of tariffs, if they are implemented, is to source goods from elsewhere. That is not an option for autos.
Trump’s trade policies are now going full circle. Manufacturers cannot get cheaper inputs from anywhere else, lest they fall afoul of Trump’s USMCA, but would have to pay more for everything because of his tariffs.
Similar stories could abound in agriculture, textiles, and even the construction industry. One of the big advantages of the USMCA, for example, was greater U.S. access to the Canadian market for agricultural products: What would be first on the list of Canadian retaliation?
Trump’s threatened tariffs would be economic insanity, which is probably why his surrogates present the very specter of tariffs as gamesmanship, and not a real blueprint. The fear, and it’s genuine one, is that tariffs just like those are exactly the blueprint Trump ran and won on. The worst-case scenario could become the default setting.
This post is part of FP’s ongoing coverage of the Trump transition. Follow along here.