President Trump is desperate to show progress on immigration, and to do so he is prepared to wreak havoc on American consumers and the economy. As many of you have heard in the Lead article’s reporting, President Trump announced on day one that if America’s neighbors do not stop illegal border crossings and China does not crack down, a 25% penalty will be imposed on Canada and Mexico. , and said it would impose an additional 10% tariff on China. It’s even tougher when it comes to fentanyl:
On his first day in office, President Trump said he would impose 25% tariffs on Canada and Mexico on “all products imported into the United States.” pic.twitter.com/lqt4AynhDN
— Kaitlan Collins (@kaitlancollins) November 25, 2024
Please note that Nick and I have overlapped posts today, but with different focuses. Nick looks at Mexico, Canada, their trade agreements, and the implications for bilateral relations, but below he focuses primarily on the implications for the United States.
I’ll tell you, I’ve previously pointed out that President Trump has a relatively easy way to quickly make a lot of progress on immigration, targeting employers. A few local raids on employers in other industries, using a large but less serious villain like Marriott as an example, would garner a small number of people’s attention. . But Team Trump clearly has no desire to cross swords with American companies. He would rather pressure others to do his dirty work.
But instead, Trump would rather grab a blunt weapon and destroy China than solve the problem. This is one of those situations where conventional wisdom is correct. Regardless of whether you think deep immigration cuts are a good idea (and which side you take on the cost of U.S. workers, for example), these proposed tariff increases will do little to help President Trump achieve his goals. It will push up inflation. The best hope here is that the “Trump is crazy” performance will devise enough means for Canada and Mexico to force Trump to declare victory, no matter what actually happens. But can or will either country undertake appeasement on a fast enough schedule?
Below are some notable observations about the Trump plan. Perhaps readers can also provide examples of expected effects in their own industries.
From the Financial Times:
“Strict new tariffs on imports from the United States’ three largest trading partners would significantly increase costs and disrupt business in all economies involved,” said Erika York of the Tax Foundation in Washington. told a think tank based in . “Even the threat of tariffs can have a chilling effect.”
Reuters notes that if President Trump follows through on his threats, he would be violating agreements with Mexico and Canada.
President Donald Trump, who takes office on January 20, said he would impose a 25% tariff on imports from Canada and Mexico until they crack down on drugs, particularly fentanyl, and migrants crossing the border. -Trade agreements.
The Wall Street Journal elaborated on the treaty issue as follows:
The tariff threats against Mexico and Canada were the biggest surprise and signal that President Trump is keen to restart the U.S.-Mexico-Canada Agreement, a free trade agreement that went into effect in 2020. USMCA replaces the decades-old NAFTA agreement. President Trump has repeatedly called it the “worst trade deal in history” that has widened the U.S. trade deficit and eliminated millions of American manufacturing jobs, particularly in the auto sector.
Alberto Villarreal, managing director of Nepanoa, said in Chicago that the threat of tariffs comes not only from President Trump’s efforts to include immigration, security and drugs in negotiations that usually revolve only around trade, but also from 2026. He said this signaled that he was trying to accelerate the planned review of the USMCA. A consulting company that provides services to companies that want to set up shop in Mexico.
“If President Trump immediately and unilaterally imposes tariffs, this would mean ‘nuclear-arming’ USMCA,” he said.
Close economic ties between the United States, Canada, and Mexico mean that trade disruptions caused by tariffs can have far-reaching effects.
The BBC reminded readers of President Trump’s further threat to end China’s most-favored-nation status with the United States. However, it does not appear that he has the power to revoke most-favored-nation status himself, since this was codified by treaty as approved by Congress.
Tariffs from Canada and Mexico would not only devastate exports from both countries, they would also hurt U.S. manufacturers who use Mexico as a U.S. production hub. Reuter said this again.
The United States accounted for more than 83% of Mexico’s exports in 2023, and 75% of Canada’s exports.
The tariffs could also pose problems for foreign companies, including many Asian automakers and electronics makers, that use Mexico as a gateway for low-cost production to the U.S. market.
A quick search estimates that Mexico’s exports of goods and services range from 36% to 43%, with Canada at 34%.
Note that China may be relatively breakout. From CNBC:
Kinger Lau, Goldman Sachs’ chief China equity strategist, said on CNBC’s “Squawk Box Asia” on Tuesday that the 10% tariffs on China are lower than market expectations of 20% to 30%. He expects China to cut interest rates, increase fiscal stimulus and moderate its currency to counter the economic impact of higher tariffs.
Although the expected impact on inflation does not seem dramatic, it is:
A flat 25% tariff on Canadian and Mexican imports would essentially increase inflation by 0.6%, or impose an additional tax of up to $950 a year on every American household. The prices of houses and home renovations will rise explosively. I also produce.
— Just 1ncent1ve (@1ncent1ve) November 26, 2024
Or perhaps it is, but this study almost certainly does not allow for substitution.
Researchers have warned that another round of large-scale tariffs risks causing U.S. inflation to spike again.
The Center for American Progress think tank estimated that Trump’s tariffs would cost middle-income households between $2,500 and $3,900 each year.
https://t.co/iPeL0moibV
— Kite🪁 (@MayMayln) November 26, 2024
Some Twitter users argue that President Trump’s past tariffs did not increase inflation. Some say it’s because there are limits.
Context matters #Tariff. President Trump’s previous tariffs targeted specific industries to raise prices. That’s fine. Applying a flat tariff at a time when inflation is already a concern will significantly increase the price of consumer goods. Customs duties – Wikipedia
— Miller (@Mf99k) November 26, 2024
And, as you may recall from the Financial Times graph above, another mitigating factor is that imports have moved from China to Mexico.
Fuel prices will impact sensitive categories, as consumers regularly pay for gas and low-income groups are disproportionately affected.
If President Trump’s threat to impose 25% tariffs on all Canadian products is taken seriously, one of the first consequences will be an immediate rise in gas prices, especially in the Midwest – as crude oil in Canadian pipelines increases. This is because it is transported and supplied to major refineries across the United States. pic.twitter.com/hbKXFXGtOa
— Joey Politano 🏳️🌈 (@JosephPolitano) November 26, 2024
It will also affect food prices visible to consumers through store and restaurant prices (although they are trying to adapt through menu changes).
President Trump just promised to impose tariffs on America’s largest agricultural trading partner.
Below is a list of food items that are expected to see significant price increases after President Trump takes office. https://t.co/w1JsPBcBfq pic.twitter.com/uFx0ppGUGj
— Joshua Reid Eakle 🗽 (@JoshEakle) November 26, 2024
In the article cited above, the Journal cites other products expected to see significant growth, particularly automobiles. Please note the administrative complexity of some supply chains being hit by tariffs multiple times.
Tariffs are likely to increase U.S. steel and aluminum prices, as Canada and Mexico are major suppliers of these metals to the U.S. market. The United States buys nearly all of Canada’s oil.
U.S. automakers, including General Motors and Ford Motor Co., have spent decades planning their factory locations around free trade between the three countries. Roughly 16% of the cars sold in the U.S. this year, or about 2.5 million cars, trucks and SUVs, will be produced in Mexico this year, according to projections from research firm Words Intelligence. Vehicles manufactured in Canada will account for about 7% of U.S. sales.
Tariffs could hit the auto supply base hard and push up prices in the United States. Hundreds of parts suppliers operate in Mexico, supplying both local and U.S. factories. Some parts cross borders multiple times during various stages of production before becoming a finished vehicle, said Mark Barot, head of automotive and mobility at consultancy Plante Morin.
Nor has Mexico and Canada retaliated.
Let’s not forget Mr. Market. If President Trump presses ahead, the dollar will rise (as it has already done slightly) on expectations that the Fed will raise interest rates to try to rein in inflation. Mr. Market doesn’t like rising interest rates. And banks could seriously err on the wrong foot again by investing in long-term debt again on the hope that the trend toward lower interest rates is here to stay.
Judge Scott Ritter, in Judge Napolitano’s latest speech, argues that President Trump is engaging in a bait-and-switch tactic of naming particularly regressive Russian hardliners on his team while promising to disengage from Ukraine as a de-escalation. He made an indignant remark about it. Ritter believes Gorka’s comments made it impossible for Putin to talk to Trump.
Sebastian Gorka, Trump’s new counterterrorism adviser, called Putin a “thug” and said Trump intended to end the war in Ukraine by threatening to flood Ukraine with military aid. He said he intended to make current U.S. aid look like “peanuts.” pic.twitter.com/jKkfmmzvoK
— Jeremy Scahill (@jeremyscahill) November 25, 2024
We expect to see a similar bait-and-switch on the inflation front. It is acknowledged that there has always been tension between President Trump’s promises to eliminate illegal immigration and curb inflation. However, there is a lot of heat surrounding these plans, as President Trump does not intend to go that far in restricting immigration because he does not want to unduly offend the traditional Republican base of small business owners. It was. But the Mexican and Canadian tariffs are an afterthought, and are clearly going to be even more economically negative for the United States and for many consumers.
