Trump is about to shoot himself in the foot with his favourite weapon

He’s not even in office yet, and Donald Trump is creating chaos with his threat to impose new tariffs on the United States’ three biggest trading partners, including two with which it has a free trade agreement.

Posting on his social media platform, Truth Social, Trump announced on Monday that he would hit Mexico and Canada with tariffs of 25 per cent on all goods they export to the US from day one of his presidency and add another 10 per cent to tariffs on Chinese imports.

Donald Trump’s tough tariff talk could translate into a trade own goal.Credit: Bloomberg

He tied the decision to illegal immigration and imports of fentanyl from Mexico and Canada, and China’s failure to stop the flow of chemicals used to make the opioid painkiller.

That’s despite the flow of illegal immigrants falling dramatically this year, particularly across the US southern border. Seizures of fentanyl have also fallen significantly.

Nevertheless, the post on Truth Social (where else would the president-elect announce his policies?) plays to two key themes of Trump’s presidential campaign: illegal immigration and unfair trade.

The prospective deployment of tariffs – Trump’s weapon of choice for geopolitics – may be a negotiating ploy, as well as a demonstration to his supporters of his intent to deliver on his promises. It’s also a warning of what’s to come when he actually takes office. If he can do this to his three major trading partners ...

Trump presumably sees his post as an opportunity to show that he can use tariffs to coerce trading partners into concessions, as he did when previously in the White House.

Indeed, he threatened Mexico with tariffs then. Mexico promised to stop the flow of illegal immigrants, made a brief show of attempting to do so, he didn’t impose the tariffs and nothing much changed.

Similarly, after imposing tariffs on about $US360 billion of China’s exports to the US in 2018-19 and threatening more, he negotiated a deal under which China agreed to buy hundreds of billions of dollars more US products (the “Phase One” trade deal was signed in January 2020).

It looked like and was depicted as a Trump victory – except that China’s imports from the US remained at pre-trade war levels. China’s trade surplus with the US has shrunk, but there have been bulges elsewhere as Chinese companies simply rerouted their exports to the US.

The way tariffs rebound against those who wield them shows how crude a weapon they are – and how little Trump understands them.

If Mexican President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau have any sense, they’ll learn from those experiences.

They’ll make subservient noises, promise to stop the (in Canada’s case, modest) flow of immigrants, and Sheinbaum will pledge to crack down on fentanyl production and allow Trump to proclaim yet another tariff-driven success.

China will do the same, although it knows that Trump has pledged a 60 per cent tariff on all its exports to the US and, with a cabinet flush with China hawks, there will be bigger battles to come than the 10 per cent additional rate he foreshadowed on Monday.

The targeting of Mexico and Canada for the first deployment of the favourite weapon in his arsenal is a curious choice, given their status as not just the US’s two biggest trade partners, but also co-signatories to the USMCA (United States-Mexico-Canada Agreement) free trade deal that Trump himself negotiated in 2018.

The agreement came into force in 2020, replacing – or, in reality, modestly updating – the old North American Free Trade Agreement (NAFTA).

The imposition of the new tariffs might violate the USMCA, which covers the $US1.8 trillion ($2.8 trillion) of trade between the three countries.

But of more pragmatic concern is that, if Trump’s tariffs were actually imposed, all three economies would be significantly damaged.

The US might suffer less, given that exports from Mexico and Canada to the US, which total about $US1.3 trillion, are larger than its exports to them, but the self-inflicted damage would still be material.

Since NAFTA came into effect in 1994, the economies of the US and Mexico have been increasingly integrated. Trump’s trade war with China during his last term accelerated that integration. Mexico’s exports to the US rose from $US329 billion in 2020, when the USMCA came into force, to $US480 billion last year.

The largest elements of those imports are manufactured goods, particularly auto parts and vehicles, with exports of agricultural products, particularly fruit and vegetables (and tequila) also substantial.

The car industry is particularly integrated with Mexico and Canada. About $US100 billion of auto parts are shipped from Canada and (predominantly) Mexico to the United States each year, as well as about 4 million fully built vehicles. Toyota, GM, Ford and Stellantis have plants in either or both countries. Between them, Mexico and Canada produce about 16 per cent of all vehicles sold in the US.

If Trump follows through on tariffs, the US auto industry will be severely disrupted. Given that parts often crisscross the border several times before the finished vehicles are produced, retaliatory tariffs could add to the disruption, costs and the US inflation rate.

Similarly, tariffs on Mexico’s exports of fruit and vegetables, beef, pork, fertilisers, tequila and mescal would feed into higher food costs.

About a third of Canada’s exports to the US are oil. While the US is now the world’s largest oil producer, it largely produces light crude while Canada’s is much heavier.

The US imports about 8.3 million barrels a day of oil – about 40 per cent of the crude refined in the US – with Canada (more than 4 million barrels a day) and Mexico (more than 500,000 barrels a day) providing about 70 per cent of all US oil imports.

If Trump does impose his tariffs, US petrol prices would rise.

The bottom line: Trump’s tariffs would hit the economies of all three USMCA partners and, although Mexico and Canada might be hit harder and China might be singed, the US would also experience lower economic growth, higher inflation and job losses.

The outcome for the US, whose major exports to those partners are cars, car parts, oil and refined petroleum products, along with agricultural products, would be worse if its trading partners retaliated.

If Trump does ignite a trade war with the country’s biggest and closest trading partners, there would also be collateral damage, given that the USMCA partners represent more than 16 per cent of global GDP, and China 19 per cent. A trade war involving those four economies would have spillover effects for a fragile global economy.

The way tariffs rebound against those who wield them shows how crude a weapon they are – and how little Trump understands them.

Yes, they get the attention of those they are aimed at, and their threat provides some leverage in negotiations. But if Trump actually imposes them, he would be shooting himself in the foot by hurting those who believed him when he promised to bring down inflation and their costs of living.

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