Trump’s decision to move ahead with his 25 per cent tariffs on Canada and Mexico after agreeing to an initial 30 day pause is fraught with political risk. The American importers who pay the tariffs will likely pass on costs to consumers - unless Canadian and Mexican producers decide to eat the difference.
If the tariffs increase prices but fail to revive US manufacturing as promised, Trump will face the risk of a voter backlash. This would constitute a damaging blow to his “America First” economic agenda.
The US President was elected on an economic platform to ease cost of living pressures for Middle America, so the tariffs are a major political gamble. Already, a spike in the price of eggs has become a running sore for the new administration.
Canada and Mexico have vowed to respond to the Trump tariffs with retaliatory measures and the US sharemarket was spooked on Monday, with the S&P 500 falling 1.8 per cent - the largest daily drop of 2025 so far.
There are growing fears the US economy faces a crucial turning point. The combination of Trump’s tariff, tax cut and mass deportation policies are stoking fears about the upside risks to inflation.
While it has moderated, US annual inflation remains elevated at three per cent - well above the Federal Reserve’s 2 per cent target. The CPI rose 0.5 per cent between December and January, the fastest one month increase since mid 2023.
The Federal Reserve held rates steady in January and has clearly signalled its concern about the inflationary risks of Mr Trump’s suite of economic policies.
Leading Australian economist Warwick McKibbin has modelled the impact of Trump’s tariffs on Canada, Mexico and China for the Peterson Institute of International Economics. He found US inflation in 2025 would be at least 0.5 per cent higher and, with retaliation from other nations, it would be one per cent higher than otherwise. The biggest losers would be those in the agriculture and manufacturing sectors.
Early warnings were also sounded by the US-based Institute for Supply Management. Its latest monthly gauge on the health of American manufacturing found the January expansion in the sector - after 26 months of contraction - had stalled in February.
It argued the results reflected the “first operational shock of the new administration’s tariff policy,” with factory hiring falling, new orders decreasing and input costs for manufacturers rising.
Yet the Trump tariffs on Canada and Mexico are just the opening shot in America’s new trade war. The US President’s steel and aluminium tariffs are due to start on March 12, followed by the sweeping reciprocal tariffs on April 2.
This heralds the beginning of a new period of economic uncertainty for the US, the global trading system and America’s relations with a host of countries with whom it holds free trade deals - including Australia.
The take-out for Canberra is that any exemption from the steel and aluminium tariffs now appears a far more forlorn hope.
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Donald Trump has pushed the button on a new trade war. But the risk is he blows up prices and keeps interest rates higher for longer while setting back relations with America’s closest partners.