"The Dumbest Trade War in History"
Trump announces tariffs on Canada and Mexico
This weekend’s financial press has been dominated by stories regarding the Trump administration’s announcement of large tariffs to be imposed on America’s closest trading partners, Canada and Mexico, which are reportedly set to go into effect on Tuesday (a delay from initial reports). This latest tariff move by the President is in stark violation of the terms of the USMCA trading pact negotiated during his first administration and appears to be somewhat of a replay of his actions then, when he unilaterally imposed large tariffs on both Canada and Mexico in clear violation of the North America Free Trade Agreement (NAFTA) signed into law in 1992 by President George HW Bush. The Trump administration has controversially justified its latest actions on the legal authority granted by Congress allowing the president to impose tariffs in the event of ‘national emergencies’, a condition which Trump has declared now exists on both our northern and southern borders as a result of illegal immigration and illicit drug traffic (primarily fentanyl).
It is far from clear (to me at least) that the tariffs to be imposed on Canada and Mexico will in fact take effect on Tuesday, or that the new tariffs will last long if they do take effect. It would not be at all surprising if Trump, having declared a national emergency at our borders and imposed tariffs in response, were suddenly to discover that the emergency was now miraculously over and take credit for having solved the crisis through his own bold action, all with little or no change in the actual facts on the ground. This is of course a classic move from the Trump playbook, which we have witnessed on several occasions, most recently with respect to Colombia, a nation which the White House misspelled as “Columbia” in its initial tariff announcement.
The President’s true motivations for imposing tariffs on Canada and Mexico are far from clear, perhaps even to Trump and his closest advisors, making it particularly difficult for the rest of us to predict how things may play out and to plan accordingly. The White House statement linking Trump’s latest round of tariffs to the newly declared national immigration and drug ‘emergency’ has been widely viewed as pretextual at best. Donald Trump has over the years made very clear that he does not feel particularly bound by the laws passed by Congress, and he views tariff policy not just as a bludgeon for beating small and weak countries into submission, on immigration or anything else (as with Colombia), but more importantly as a core component of his economic plan to “make America great again”. And in the process, perhaps, to generate a large amount of incremental tax revenue for the US government. He has gone so far as to suggest that under his plan, which may soon include the European Union, US tariff revenue will become so large that it could entirely replace federal income tax, which currently accounts for half of all US government revenue. And he has proposed the creation of a new “External Revenue Service” to collect all this money, which may explain why it is he is reportedly considering firing 90,000 new IRS agents, or reassigning them to assist with immigration control at the southern border. (I know this sounds ridiculous, but I read it in the New York Post, so it must be true.)
To reinforce his message about the primacy of tariff policy, Trump has taken to commenting with increasing frequency on the “great but highly underrated” President William McKinley (1897-1901), who featured prominently in Trump’s day-one Executive Order on Restoring Names that Made America Great. As you may recall from your college history class, it was McKinley who as a US congressman was responsible for legislating the highest tariffs in history—the McKinley tariff plan of 1890, which doubled tariffs to an average rate of 50%— although he backed off his high tariff policy when he became president a few years later. (For a more fulsome discussion of McKinley and tariffs, read this WSJ piece by Karl Rove.) Perhaps not coincidentally, it was also under President McKinley that the US government employed military force to occupy Cuba and the Philippines and to annex Hawaii, events which Trump may or may not be trying to replicate with his recent belligerent and expansionist moves in Canada, Mexico, Greenland (Denmark) and Panama.
Even under the best of circumstances, tariffs are a notoriously blunt tool with which to address one nation’s perceived grievances in the global economic order. The global economy is large, complex and rapidly changing, and it can be remarkably fragile in the face of unexpected shocks, as we saw most recently with covid. The Smoot-Hawley Tariff of 1930 may not have “caused” the Great Depression, but it did inflict serious damage on the global economy. And this was at a time when the global economy was not nearly as closely integrated as it is today.
Over the past fifty years or so, global supply chains and trading relationships have become much more complicated and in some ways more fragile. And many critical sectors of the US economy, like the auto industry, have evolved from predominantly domestic (US) businesses into regional (North American) businesses, with integrated operations and complex supply chains spread across all three countries and with parts and products moving regularly and rapidly across our mutual borders, until now on a tariff-free basis. If implemented, Trump’s new tariffs may cause massive disruption to many of these industries and wreak havoc across the North American economy, threatening trillions of dollars of economic activity and impacting tens of millions of American workers and customers. And the economic impact will be even greater if our neighbors retaliate, as they are expected to.
The WSJ editorial board fears that Trump’s latest tariff moves may set off “the dumbest trade war in history”, and it opened its latest critique of the Trump administration by reminding readers of the old Bernard Lewis joke that “it’s risky to be America’s enemy, but it can be fatal to be its friend”, particularly these days. Donald Trump has made eminently clear in both his private and public lives that he does not believe in the value of long-term mutually beneficial economic relationships, leaving few commercial counterparties glad to have done business with Trump and few of our closest trading partners and allies feeling confident in the stability of their relationships with the United States. Over the course of his life, Donald Trump has demonstrated very clearly that he holds a short-term transactional view of how the world works, and his embrace of high tariffs seems to reflect this belief. Trump seems to think that international trade is a zero-sum game in which imports are the equivalent of a financial “subsidy” from importers to exporters, and that the economic burden of tariffs always falls on the exporting nation.
Needless to say, this is not how the world of international trade actually works, although few of Trump’s closest associates will acknowledge this, at least on the record. Trump’s nominee for Chair of the Council of Economic Advisors is Stephen Miran, a Harvard-educated hedge fund economist known for his somewhat unorthodox pro-tariff views, which no doubt helped land him this plum job. Moran’s views on trade and tariffs, unlike those of most of the other people around Trump, are at least on paper grounded in orthodox economic theory, albeit with a number of ivory tower assumptions which may remind some readers of the old “assume a can opener” joke about economists. But even Miran acknowledges that in the real world a policy of high tariffs carries a significant risk of failure, with potentially serious and long-lasting consequences. “There is a path by which these [high tariff] policies can be implemented without material adverse consequences”, said Miran, “but it is [a] narrow [one]” with “potentially volatile consequences”.
And “potentially volatile consequences” are almost certainly what we should all expect to come from Trump’s latest tariff plan. If Trump leaves the tariffs in place (without exemptions) for an extended period of time, the economic disruption and damage may be huge, spooking the capital markets and creating significant political ramifications even (or particularly) within his own party. If instead he withdraws the tariffs over the next few weeks, as he did with Colombia and with his ill-considered Executive Order freezing all federal grants, he runs the risk of further damaging his own credibility and possibly putting at risk other policy priorities (eg tax cuts). And as we know, a wounded presidential ego carries its own risks, particularly one as fragile as that of President Trump. But whichever direction he takes, it is quite likely that with his tariff announcement President Trump has already done significant and lasting damage to our national relations with Canada and Mexico, to the global reputation of the United States and to the stability of the world economic order.
Which is quite an accomplishment for just two weeks in office.
Links:
White House Statement Announcing Tariffs, 1 February 2025
The Dumbest Trade War in History, WSJ Editorial, 31 January 2025
The End of North America, Paul Krugman, Substack, 31 January 2025
Trump Tariffs Threaten to Upend Global Order, NY Times, 2 February 2025
Here’s What to Know about Trump Tariffs, NY Times, 1 February 2025
Trump’s New Economist Makes the Case for 20% Tariffs, WSJ, 12 January 2025
Trump’s Brutal Tariffs Far Outstrip Any He has Imposed Before, The Econonist, 2 February 2025