Trump fires first shot in his self-destructive war on the world

Donald Trump has spent the first two weeks of his second term as president sowing chaos and fear within the United States and its domestic agencies. Now, he’s about to start doing the same outside the US.

The tariffs on Canada, Mexico and China that kick in on Tuesday in the US are a foretaste of what is to come: the first shots in what could become a devastating trade war between the US and the rest of the world.

Donald Trump’s tariffs might do more damage to Canada and Mexico than the United States, but will cause immense disruption to US industry.Credit: AP

Any thought that Trump might have been bluffing and using the threat of tariffs as negotiating leverage, whether for trade or non-trade issues, has been dispelled by his use of the pretext of blaming Canada and Mexico for illegal immigrants and fentanyl imports (the supposed reason for the new tariff on imports from China) to slap punitive tariffs on them.

Those tariffs could become even more punitive because Trump said he would escalate them if Canada and Mexico retaliated.

Canada has already said it will impose 25 per cent tariffs on more than $US105 billion ($171 billion) of US goods, while Mexico has said it will respond and is reported to be considering a particularly nasty strategy under which it would rotate the goods subject to its tariffs, generating uncertainty and broadening and deepening their impact.

Thus, the Americas’ trade war appears pre-destined to intensify, with a commensurate increase in the damage to all three economies.

If America’s closest trading partners – and in Canada, one of its oldest and strongest allies – are Trump’s initial targets of choice, it seems almost inevitable that the US will follow up with Trump’s 10 to 20 per cent baseline tariffs on all imports and the 60 per cent tariff he has said he will impose on imports from China.

Even without that next phase in his trade wars on everyone, the decision to attack America’s two partners in the US-Mexico-Canada free trade agreement – an agreement negotiated by Trump himself in his earlier term – will be destructive, and from America’s perspective, self-destructive.

While it might do more damage to Canada and Mexico than the US, it will cause immense disruption to US industry, particularly the auto, agricultural and oil-refining industries. It will add to the US inflation rate, increase the jobless rate and subtract from America’s economic growth rate.

Tariffs are a tax on consumers. Trump’s tariffs are a tax on US consumers – the duties are paid by the importer at the border, not as Trump, in his wilful ignorance, continues to assert, by the exporter.

Canadian Prime Minister Justin Trudeau hit back with tariffs on US goods. Credit: AP

Trump wants the trillions of dollars of tariff revenues his advisers claim his tariffs will raise (his treasury secretary, Scott Bessent, suggests between $US2.5 trillion and $US3 trillion over a decade) to pay for the extension and expansion at a cost of about $US4.6 trillion over a decade, of the tax cuts for companies and the wealthy he enacted in 2017.

So, to fund those regressive tax cuts, Trump has declared war on economies that have been parties to a free trade zone for more than 30 years, on industries that have constructed supply chains that are highly dependent on free trade between the US, Mexico and Canada, and on the lower-income households who helped re-elect him.

The industry arguably most impacted by the tariffs is the US auto industry, which has complex and highly integrated supply chains across both the northern and southern borders.

Mexico accounts for about 42 per cent of all auto parts shipped into the US, and Canada at least 13 per cent, with some parts crisscrossing the borders half-a-dozen times or more. The effective rate on those components would be multiples of 25 per cent.

Trump’s deployment of tariffs is based on an obdurate unwillingness, or inability, to accept how they actually work.

It would take years for the US carmakers to reconfigure their operations to avoid the tariffs.

Meanwhile, prices will go up to reflect the tariffs, and profits, investment and jobs will be lost on either side of the borders, albeit probably more of them in Mexico and Canada than in the US.

Similarly, even though Trump has imposed “only” a 10 per cent tariff rate on oil imports from Canada, US refiners will be hit. Almost all of Canada’s oil exports are to the US, which, despite being a net exporter of oil, imports heavier crude grades from Canada that its domestic industry can’t supply.

About 60 per cent of all US oil imports are from Canada and there are refineries, particularly those in America’s Midwest, that have been designed specifically for Canada’s heavier oils and which can’t readily be converted to accept imports from other producers. Tariffs on Canadian oil mean higher gasoline prices in parts of the US.

When Trump imposed tariffs on imports from China in 2018, he targeted about $US360 billion of China’s exports to the US. The tariffs he announced at the weekend cover about $US1 trillion of imports, providing an indication of how much more impactful they will be, even if the confrontation doesn’t escalate as Canada and Mexico respond.

Those earlier tariffs on China are estimated to have added about a tenth of a percentage point to US inflation and had twice that impact in reducing US GDP.

The US Tax Foundation estimates the new tariffs on Canada, Mexico, and China will have double the impact on US GDP of the earlier tariffs on China. And a full-blown trade war with the rest of the world, as Trump has promised, will have more than six times their impact at 1.3 per cent of US GDP – before taking into account any retaliation.

That’s why The Wall Street Journal has called Trump’s actions, undertaken on the flimsiest of pretexts and without any real understanding of the consequences, “the dumbest trade war in history”.

The tariffs have sent a shiver through global markets. Credit: Bloomberg

His tariffs, unprovoked by anything trade-related that Canada, Mexico or even China have done, will cause chaos and disruption to US industry, higher prices for consumers and/or lower profits for US companies, subtract from US growth and add to inflation and interest rates.

It will also – although this doesn’t seem to concern Trump – fracture America’s relationships with its closest allies and force them to create new trading blocs with countries that America would consider foes, most notably China.

Trump’s deployment of tariffs is based on an obdurate unwillingness, or inability, to accept how they actually work.

As they bite, the effects of his willingness to start a trade war against America’s most important trading partners will gradually show, and as Americans are confronted by higher prices and/or reduced access to products they are used to buying, the price and pain of that ignorance will be revealed.

Unhappily, the rest of the world will share their pain.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.