Dumb and dumber: Trump’s war on the world is not going to plan

If Donald Trump’s decision to slap tariffs on Canada and Mexico was, as The Wall Street Journal described it, the dumbest trade war ever, then his decision to pause them even before they were implemented validates that judgment.

Having fired the biggest weapon in the US trade arsenal at its two closest economic partners, while boasting about the torrents of revenue he expected to gain from his beloved tariffs, Trump has backed away, at the eleventh hour, from implementing the tariffs in return for ... some troop exercises on America’s southern and northern borders.

Trump may have to rethink his belief that trade wars are “easy to win”. Credit: AP

After discussions between Mexico’s Claudia Sheinbaum and Canada’s Justin Trudeau, both Mexico and Canada each agreed to deploy 10,000 personnel on their borders to “stop the flow of fentanyl”(in Canada’s case the merest of trickles) and illegal immigrants (ditto).

In return, they get a one-month reprieve from the 25 per cent tariffs on their exports to the US that Trump announced on Saturday.

Having so directly tied the proposed tariffs to immigration and fentanyl, Trump has discarded the economic case he had made for the tariffs; that somehow, via the trade surpluses Mexico and Canada have with the US, America had been “subsidising” them.

If Canada and Mexico make good on their promises to shift troops and other personnel to their borders and set up joint taskforces to combat organised crime, fentanyl and money laundering, what justification could there be for reactivating the tariffs?

Trump chose the wrong targets for his opening salvo of the global trade war he had foreshadowed and his messaging was confused. He aimed his most powerful weapon at his closest trade allies and has gained nothing substantial, other than some easy and painless pledges on border personnel, in response.

Were the tariffs designed to raise revenue to fund his planned tax cuts for US companies and the wealthy or were leverage to coerce Mexico and Canada to help strengthen America’s border security? Both? Why lump Canada in with Mexico if the revenue-raising potential of the tariffs were a secondary issue?

It would now appear that, in agreeing the pause, Trump has walked back the unfair trade, revenue-raising strand to his justifications for the tariffs.

Mexico and Canada are parties to the North American Free Trade agreement renegotiated by Trump in 2020 (and relabelled the United States-Mexico-Canada Agreement) that Trump said at the time was “the fairest, most balanced, and beneficial trade agreement we have ever signed into law.”

Since then, enormous cross-border investments have been made and the three economies and their supply chains have been even more tightly integrated.

Wall Street’s violent reaction to the tariffs may have played a role in Trump’s reversal. Credit: AP

That investment and integration has been expanded and deepened by the “friend shoring” that has been occurring in Mexico and Canada in response to the pandemic and the increased trade and geopolitical tensions between the US and China.

The severity of the implications of the tariffs Trump announced for all three economies – including America’s – therefore provoked reactions that may have unsettled Trump and his advisers.

Financial markets were, until the pause with Mexico was announced, extremely volatile. The US sharemarket tumbled and then bounced; short-term bond yields spiked before falling back; oil prices followed a similar pattern; the US dollar strengthened sharply and Bitcoin’s price plunged before recovering most of its losses.

Condemnation of the proposed tariffs came from across the US economy, from the steelworkers’ union to the car industry and even a number of Republican congressmen. No-one could understand why the US was targeting its closest trade partners and risking the turmoil and economic damage that would generate.

That brief insight into the reactions to the tariffs, particularly the financial markets’ reaction (Trump is very sensitive to what happens in the sharemarket and crypto market and his economic advisers, given America’s indebtedness, would be very focused on the bond market), might lessen the administration’s enthusiasm for reinstating them in a month’s time.

The “guardrails” that financial market investors were convinced would dissuade Trump from launching another full-scale global trade war may have surfaced.

The gameplan for Mexico and Canada ought now be obvious.

Xi Jinping and China showed how to respond to a Trump trade war.Credit: Bloomberg

They just do what China did in 2020, when it agreed a “Phase One” deal with the US after Trump imposed tariffs on $US360 billion of its exports. Agree a deal on border security, make it look like they’re complying for a while and then, when Trump, having declared victory, shifts his attention elsewhere, revert to business as usual.

That’s what China did. It gave Trump his “win”, agreeing to buy $US200 billion ($322 billion) more of US goods, energy and agricultural products than it had in 2017, before the trade war started. It actually bought 58 per cent of those products it had agreed to purchase, but its total imports from the US ended up lower than they had been in 2017. It played “rope-a-dope” with Trump.

China also used that time, and the four years that the Biden administration left Trump’s tariffs in place, to diversify the sources of its imports away from the US. Brazil, for instance is now its major supplier of agricultural imports. Its companies also re-routed exports to the US through third countries, like Vietnam and Mexico, to circumvent the tariffs.

If Trump doesn’t reinstate the tariffs on Mexico and Canada – the countries whose exports would be the biggest source of tariff revenues (albeit from the importers and ultimately US consumers rather than the Mexican and Canadian exporters) – he’ll have to look elsewhere for the funding for his $US4.6 trillion of tax cuts.

For the moment, at least, the 10 per cent tariff on Chinese imports he also announced in Saturday (again based on its role in the fentanyl supply chain) is going ahead and he has foreshadowed a 60 per cent rate once the review of America’s trade, economic and national security policies has been completed on April 1.

He’s also flagged tariffs on the European Union, saying at the weekend that the EU had “abused the US for years; that its trade practices were an “atrocity” and that the tariffs would “definitely happen”.

The EU has had years to prepare for the return of Trump and his trade policies.

More than two years ago, it created an “anti-coercion instrument” designed to enable the EU to respond to economic coercion that would enable the European Commission to restrict access to EU markets and provide funding for any of its industries hurt by trade hostilities.

Like Canada – and as China did during the last trade war – it has also drawn up a hit list of US industries it could target for retaliation if Trump does hit the region with tariffs, focused on those that have the most political sensitivity.

The severity of the implications of the tariffs Trump announced for all three economies – including America’s – therefore provoked reactions that may have unsettled Trump and his advisers.

China no doubt has something similar, but it has an extra weapon in its armoury, its domination of strategic minerals.

It has already, in response to the Biden administration’s sanctions on Chinese companies and sectors, cut off US access to some of them but there’s a long list of others that are vital to US industries and its military for which there are no significant alternate suppliers.

China’s trillion-dollar trade surplus, its substantial excess factory capacity, its over-reliance on exports and a much weaker economy do make it more vulnerable to a new trade war than in 2018. But it has the ability, and has positioned itself, to construct an asymmetrical response to another round of tariffs.

Back in 2018 Trump proclaimed that “trade wars are good and easy to win.” If he reactivates the tariffs on Mexico and Canada, and/or targets Europe and China, he’ll find that neither of those premises hold true.

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