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How Trump’s Tariffs Aim a Wrecking Ball at the Economy of America’s Allies


These translations are done via Google Translate

After weeks of threats, a North American trade war has erupted. Businesses and investors are bracing for the fallout.

Donald Trump’s move to invoke an emergency and impose tariffs on Canada, Mexico and China is the most extensive act of protectionism taken by a US president in almost a century. In what may be the biggest geopolitical and economic consequence, it swings a wrecking ball through the regional compact at the foundation of US global competitiveness and economic power.

US firms for decades benefited from the economic alliance between the US, Canada and Mexico, which established highly integrated supply chains that exploit a rare and enviable combination: US innovation, Canadian resource wealth and low-cost labor in Mexico.

That came at a cost to US manufacturing jobs and contributed to the decay of communities that Trump has focused on politically since 2016 — campaigning on promises to bring home factory jobs and prescribing tariffs as a cure-all for ills ranging from the drug crisis to the ballooning national debt.

But even Trump once hailed the North American alliance as a key element of US power. “In a true sense, it’s also a partnership with Mexico and Canada and ourselves against the world,” he said in January 2020 when he signed the US-Mexico-Canada Agreement, which replaced a similar pact from the 1990s with a renegotiated deal his advisers hailed as a counterweight to China’s economic rise.

TOPSHOT-US-MEXICO-CANADA-TRADE-ECONOMY
President Trump signed the United States-Mexico-Canada Trade Agreement, known as USMCA, during a ceremony on the South Lawn of the White House in 2020.Photographer: Saul Loeb/AFP/Getty Images

Trump’s unpredictability is legendary and, depending on what transpires of the next 24 hours, he may still reverse course ahead of the tariffs taking effect at 12:01 a.m. on Tuesday, as he has before. But with his move on Saturday at his Mar-a-Lago estate in Florida — announcing sweeping 25% tariffs on imports from Canada and Mexico, with only a 10% exception for Canadian energy, Trump has again attacked the foundational idea that low trade barriers benefit economies. That he announced only a 10% tariff on goods from China, the US’s biggest economic rival, has only added to the geopolitical confusion.

The biggest imposition of duties since the 1930 Smoot-Hawley tariffs quickly prompted Canada, China and Mexico to announce retaliation. Prime Minister Justin Trudeau threatened not just tariffs on American beer and bourbon but also other potential actions on critical minerals the US needs. That may lead to escalation from the US: The executive orders Trump signed included a retaliation clause giving him room to increase tariff rates even further.

It also drew criticism from companies and economists who see the move provoking an unnecessary trade war that will not only increase US prices but reduce growth and play into the hands of America’s biggest economic rival.

This self-inflicted supply shock is a strategic gift to Xi Jinping,” Larry Summers, who served as Treasury secretary in the Bill Clinton administration, as an adviser to President Barack Obama and is now a Bloomberg contributor, said in a string of social media posts Sunday.

Competitive Edge, Trust

In practical terms, the new tariffs will work against US competitiveness by reducing the access domestic manufacturers have to cheap imported components, said Wendy Cutler, a former US trade negotiator who now leads the Asia Society Policy Institute.

In strategic terms, it will undermine the value of any trade agreement or treaty with the US.

“It’s going to isolate us or disconnect us from the rest of the world,” Cutler said, which in some cases mean countries will be “more enthusiastic towards Beijing’s overtures.”

There’s potential for further disconnect, with Trump also threatening tariffs on the European Union and other trading partners, as well as on products like semiconductors and steel.

Bundles of steel tubes at a trading market in the outskirts of Shanghai, China, on Monday, Aug. 19, 2024.
Bundles of steel tubes at a trading market in the outskirts of Shanghai, China.Photographer: Qilai Shen/Bloomberg

Tariffs also hampers the US ability to compete with Beijing, which is building its own network of economic partnerships around the world, while also tying the hands of US companies looking for alternatives to production in China, said Mary Lovely, a senior fellow at the Peterson Institute for International Economics.

With a few strokes of his pen, she said, Trump destroyed the case for relocating low-cost production out of China and into places like Mexico. Trump himself encouraged that with his first trade war against China and his renegotiation of the USMCA, which at the time he called the “largest, fairest, most balanced, and modern trade agreement ever achieved.” It gained further momentum when the Biden administration encouraged companies to embrace “friend-shoring” in allied countries like Mexico.

For that to work, US companies need to have access to places like Mexico where they can locate low-cost production in order to compete with China, Lovely said. “This just makes a mockery of all those activities and these businesses,” she said.

Trump’s political allies and base swiftly hailed the move as delivering on a campaign promise to crack down on migration and the scourge of fentanyl, which causes tens of thousands of overdose deaths each year. In his own social media post Sunday, Trump recognized that the tariffs may cause economic disruption but argued that they would be worth it in the end.

“THIS WILL BE THE GOLDEN AGE OF AMERICA! WILL THERE BE SOME PAIN? YES, MAYBE (AND MAYBE NOT!). BUT WE WILL MAKE AMERICA GREAT AGAIN, AND IT WILL ALL BE WORTH THE PRICE THAT MUST BE PAID. WE ARE A COUNTRY THAT IS NOW BEING RUN WITH COMMON SENSE — AND THE RESULTS WILL BE SPECTACULAR!!!” he wrote.

For businesses, though, the pain is likely to be real and raises longer-term questions about the supply chains that have taken decades to build up.

“A 25% tariff on Canada and Mexico threatens to upend the very supply chains that have made US manufacturing more competitive globally,” National Association of Manufacturers President and CEO Jay Timmons said in a statement. “The ripple effects will be severe,” he added. “Ultimately, manufacturers will bear the brunt of these tariffs, undermining our ability to sell our products at a competitive price and putting American jobs at risk.”

Tractor trailers wait in line at the Ysleta-Zaragoza International Bridge port of entry, on the US-Mexico border in Juarez, Chihuahua state, Mexico, on Friday, Dec. 20, 2024.
Tractor trailers wait in line at the Ysleta-Zaragoza International Bridge port of entry, on the US-Mexico border in Juarez, Chihuahua state, Mexico.Photographer: David Peinado/Bloomberg

Beyond the blow to competitiveness is the uncertainty over policy. The “America First” trade executive order Trump signed his first day in office laid out a measured process with an April 1 deadline for the incoming administration to study various trade issues and propose responses.

But the developments over the weekend came about without Trump’s full trade or economic teams in place. People familiar with the discussions said that they had been led by Peter Navarro and Stephen Miller, his two most hawkish advisers, with China included at the urging of the National Security Council. It’s not clear what role, if any, Trump’s most senior economic adviser, Treasury Secretary Scott Bessent, played in one of the biggest economic decisions a US president has taken in decades.

By invoking a national emergency and imposing tariffs, Trump is effectively throwing out his own USMCA — an agreement that gave businesses some certainty. The message instead is that “treaties are just a piece of paper that can be ripped up at will,” Lovely said.

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Trump entered office two weeks ago with the economy growing at a healthy pace, unemployment historically low and the stock market soaring. The Federal Reserve was cutting interest rates last year because inflation was slowing on a path back to its 2% target.

A trade war across North America now threatens all of it.

Among Trump’s big promises to voters and businesses has been to lower energy prices. But a more restrained 10% tariff on Canadian imports of natural gas, oil and electricity will raise costs across the US.

Heating Bill

Douglas Irwin, a trade policy historian at Dartmouth College in New Hampshire, on Sunday posted a notice Sunday from his gas company saying it would quickly raise the price of propane to heat his home to account for the tariffs, adding the comment: “If there is any doubt that the cost of the tariff is passed through to consumers.”

James Knightley, chief international economist at ING, said the burden of higher tariffs falls disproportionately on poorer households because they typically spend a bigger share of disposable income than wealthier people on physical goods rather than services. He calculated that the tariffs would deliver the typical American family of four a one-time hit of $3,342.

Bloomberg Economics crunched the numbers, too, and concluded that Trump’s move will raise the average US tariff rate to 10.7% from its current level near 3%, and “deal a significant supply shock” to the domestic economy. Using modeling that the Fed used during Trump’s first term, BE’s Nicole Gorton-Caratelli and Maeva Cousin said the trade war could knock 1.2% off of US gross domestic product and add about 0.7% to a widely watched indicator of core inflation.

The Burnaby Refinery, operated by Parkland Corp., in Burnaby, British Columbia, Canada, on Friday, Aug. 9, 2024.
The Burnaby Refinery in Burnaby, British Columbia, Canada.Photographer: James MacDonald/Bloomberg

How long tariffs will be in place and whether they’ll rise or fall remains unclear. “Still, we’d expect big tariffs to have big impacts — and what Trump has just announced is huge,” Gorton-Caratelli and Cousin wrote in a research note Sunday.

As for Canada and Mexico, Paul Ashworth, chief North America economist with Capital Economics, went so far as to warn they may fall into recessions later this year given that their exports to the US account for about 20% of their economies.

The other bad news for investors and corporate America is that profit margins may suffer.

According to data released over the weekend by Trade Partnership Worldwide, a research firm in Washington, Trump’s tariff actions against the nation’s three biggest trading partners could mean an extra $700 million in taxes paid by US companies per day — hitting especially hard in border states like Texas and North Dakota, two places where support for Trump was strong in November.

Tariffs on the three USMCA partners are going to require a fresh appraisal of costs and sourcing strategies for multinationals like consumer products maker Colgate-Pamolive Co., which announced earnings last week but didn’t include any potential incremental tariffs in its 2025 guidance, according to CFO Stanley Sutula.

“We’re planning for multiple scenarios, because it’s not just the tariff that may be on Mexico or Canada or China,” Sutula said during a conference call Friday. “It’s the impact of retaliatory tariffs that would also come into play.”

Costlier Cars

Among the most-exposed industries to a regional trade war is automotives, with vehicle suppliers accounting for more than 930,000 jobs. Tariffs would jeopardize those positions, boost costs for consumers and undermine a “highly integrated North American supply chain that is critical to US competitiveness,” according to a statement from MEMA, an association of auto industry suppliers.

According to research by BE’s Gorton-Caratelli, carmakers in the US rely on Canada and Mexico for more than 80% of some key auto parts, with American brands particularly reliant on regional suppliers.

Steven Downing, CEO of Michigan-based Gentex, which sells technology for automotive vision such as auto-dimming rearview mirrors, said on a call with investors Friday that tariffs could lead to “a little bit of chaos here in the first half of the year.” Gentex’s CFO Kevin Nash estimated an impact on raw materials from Mexico in the “$5 million to $10 million range” as a worst-case scenario.

It’s not just higher tariffs that’ll cut into earnings — a stronger dollar could too, according to Bloomberg Intelligence equity strategists Gina Martin Adams and Gillian Wolff.

“Companies will be expected to pay the price of tariffs targeted at US trading partners, so global operating margin estimates are likely to take a hit, and this could lead to weakness in equity prices just as it did in 2018” during Trump’s first-term tariff battles against China and other major trading partners, the BI analysts wrote.

Trump’s first trade wars never really ended, and the second one, which he launched less than two weeks after returning to office, appears likely only to escalate from here.

Truck transmissions move along the assemble line at the Eaton Corp. manufacturing facility in San Luis Potosi, Mexico, on Wednesday, May 27, 2020.
Truck transmissions on the assembly line at a manufacturing facility in San Luis Potosi, Mexico.Photographer: Mauricio Palos/Bloomberg
Truck transmissions on the assembly line at a manufacturing facility in San Luis Potosi, Mexico.Photographer: Mauricio Palos/Bloomberg

In invoking US fentanyl overdoses and undocumented migrants crossing the border as the reason for his tariffs, Trump has created an amorphous set of metrics for Canada, Mexico and China to meet, said Everett Eissenstat, a partner at law firm Squire Patton Boggs who served as international economic policy adviser in Trump’s first National Security Council. For that reason alone, he said, “I don’t see any off ramp in the near future.”

A dramatic reaction from financial markets on Monday might cause Trump to delay the imposition of tariffs and call for talks with Canada and Mexico. He might eventually also strike a deal with China. But in the end Trump is signaling again – and more forcefully than ever before – that he wants to remake the global economy and North America in his own particular way.

A monumental altering of the US’s relationship to its neighbors and the world is here. Because, Eissenstat said, Trump this weekend swung “a sledgehammer” at the economic order that for decades defined how North America has run.



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