People aren’t paying tariffs for buying stuff from Mexico or Canada. But that’s not the only cost to consider. The big one here is policy uncertainty.

Yesterday, I wrote two posts about Trump’s tariff threats, one on Mexico and one on Canada, that did not contain any economic arguments. My point in both of them was to take the claim that Trump was using tariffs to negotiate and show that he actually got approximately nothing for the U.S. despite his claims to victory.

Now, it’s time for some economic analysis. The tariffs have been suspended, at least for now, so it could be tempting to say that the cost of this action was also nothing. So even if I’m right that the benefits were nonexistent, so were the costs, and a nice PR win for Trump is a small positive outcome.

It is true that people aren’t actually paying tariffs for buying stuff from Mexico or Canada. But that’s not the only cost to consider. The big one that’s relevant here is policy uncertainty.

One purpose of deals such as the United States-Mexico-Canada Agreement (USMCA) or any of the other trade agreements the U.S. has with other countries is to provide some certainty to U.S. and foreign companies looking to do international business with the U.S. That includes companies from the countries that are party to the agreement and those from other countries around the world. Japanese, German, and South Korean automakers, for example, make business decisions under the assumption that the North American market has low trade barriers between Mexico, the U.S., and Canada.

Some of the most attractive things about investing in the United States are that it has secure property rights and the rule of law. Among really big countries with a large consumer base, it’s really the only game in town. So it’s no wonder that people from just about every other country want to sell stuff here, which is another way of saying they want to invest here, since the dollars we send them for their stuff come back as investment in America.

It will take more than what Trump has done to fundamentally change that state of affairs, and we should be grateful that presidents ultimately have little control over total economic production. But one of the nice things about doing business with the U.S. is supposed to be that the president doesn’t get to change trading rules on a whim, especially with respect to non-adversary countries with expansive trading relationships. That kind of policy uncertainty doesn’t usually have to be priced in to doing business with the U.S. It does have to be priced in for lots of other countries, so that makes the U.S. a more attractive place to do business.

On the margin, the uncertainty from Trump’s threats has real costs. One is in the stock market. The intraday drops due to tariff announcements ultimately aren’t very important, but longer-term comparisons in performance are. Since the presidential election, non-U.S. stocks have been catching up to the S&P 500, contrary to the past several years of U.S. outperformance.

Within the U.S., industrial stocks have underperformed the rest of the stock market since the election, in part due to uncertainty about the pricing of their inputs. About half of U.S. imports are inputs to domestic production. Investors should not have to price in this kind of uncertainty for a country like the United States, but now they do because of the way Trump has chosen to pursue this policy.

Aside from stock prices, businesses making purchasing decisions could face higher costs simply from the uncertainty about tariffs. “Even if Trump ends up coming to a permanent deal with the US’ North American partners and rescinding his proposed levies, the uncertainty surrounding his policy choices could inflate building material costs by disrupting supply chains and homebuilder timelines,” Business Insider reports.

The tariff threats also put upward pressure on interest rates, as the Federal Reserve now has to consider the possibility of higher prices from tariffs as a factor in making monetary policy, making rate cuts less likely. The inflation rate has still not returned to the Fed’s 2 percent year-over-year target since it spiked to 9 percent in 2022 and has been stuck around 3 percent since mid-2023. Combined with the federal government’s massive deficit spending, which Trump is also unlikely to significantly change, the tariff threats are another example of fiscal policy working against monetary policy, making the Fed’s job harder than it needs to be.

There are also geopolitical costs. In the future, if the U.S. wants to strike a new trade agreement with another country, decision-makers in that country are not going to forget about this episode. If the president who negotiated the USMCA and said it was “the largest, most significant, modern, and balanced trade agreement in history” is willing to completely ignore it to threaten blanket tariffs on America’s neighbors, no country should be totally confident that the U.S. will honor its trade agreements.

Then there are the constitutional costs. If the constraints on the president’s tariff powers are truly as weak as the Trump administration believes they are, giving him nearly total authority to unilaterally tax every import from entire countries, that’s a bad sign for checks and balances. If the results of Trump’s antics are seen as a political “win,” they will encourage future presidents to continue to push the envelope on “emergency” powers. I called out Joe Biden for his abuses on this front, and I’d be dishonest to not do the same for Trump. Congress needs to severely curtail “emergency” powers, which are increasingly used for things that aren’t emergencies at all.

Republicans used to criticize the president for exceeding his constitutional authority and creating uncertainty in the economy — when Barack Obama was the one doing it. The reckless way in which Trump has pursued these tariffs has imposed real costs on the U.S., even if most of the tariffs are never actually imposed. That the U.S. is bearing those costs in exchange for largely meaningless “concessions” from Mexico and Canada only reiterates that Trump’s supposedly genius negotiation skills are not making the U.S. better off.