tariffs

different application ahead

The incoming U.S. president announced last night that he is imposing 25% tariffs on products on products from Mexico and Canada; these are, of course, our top two trading partners and border states. He additionally will apply a 10% tariff on the PRC which is our third most important trading partner. These go into effect as soon as he can sign Executive Orders, 20 January 2025 following his inauguration.

Tariffs normally are a tool of statecraft intended to protect domestic industry. By forcing a fee on the commodity imported from the specific country, either the importing company absorbs this specified additional cost or passes it to the consumer buying the product (usually the latter as the company does not want its profits eaten up by paying tariff costs). The intent is to push consumers to buy the products of the home nation rather than pay this de facto tax on the commodity entering the U.S. market. Tariffs usually “protect” a nascent industry such as our Electric Vehicle production against what is thought unfair foreign competition.

What is getting short shift, in the main, about the incoming president’s declaration last night was that it specified penalizing these countries for their unwillingness or inability to prevent fentanyl from entering the United States from their shores rather than protecting our industries. In the case of Mexico and Canada, he also mentioned illegal immigration in the same breath.

That is a considerably different application of tariffs. The former president is converting tariffs into broader instruments to force these countries to alter their control over exporters to prevent actions of which he strongly disapproves. It’s one thing to discourage a country’s decision to develop an industry of its own to compete with a domestic sector of our own; it’s quite different to say that we will impose 25% higher prices on importing goods to force the government of the other country to address an sweeping action we don’t like. Trump wants both shipping of fentanyl and illegal aliens crossing the borders ended as national security threats.

This move ignores the intertwining of U.S. companies’s supply chain with all three nations, raising questions about how precisely the implementation will affect automakers, for example. Many parts for cars originate in Mexico even if final assembly is done elsewhere. Similarly, food stuffs coming easily across the border from any of the three countries would inflict higher costs on the consumer. The effects of such wide-ranging duties would shock the system here and abroad. Effects would not stop with Canada, Mexico, or China. The shock waves will affect consumers and the relevant industries so pivotal between these three states.

This ultimatum, as The New York Times labels it, is a much broader, more open-ended use of tariffs. This might be previewed now to provide flexibility for Ottawa or Mexico City to figure out details on how to stop illegal immigration or the shipment of the deadly precursor chemical. Alternately, the annoucement in late November may mean that the administration gives a rather brief window through which to grade their seriousness of these states’s reactions. We haven’t seen the Executive Order with applicable metrics by which he will grade Ottawa’s, Beijing’s, and Mexico City’s steps.

Will he leave the tariffs in place until 100% of the fentanyl or movement of illegals into the United States deemed foreign in origin ends? As president, he can decide at any point that the change in behavior is adequate but one might expect metrics to illustrate that as well. President-elect Trump tends to react by gut so he is less likely to worry about that part than other leaders but in theory the question will arise.

Will these governments respond to tariffs immediately to thwart those operating in their sovereign territory? This is harder to answer as tariffs are not an on/off switch which instantaneously show success. Tariffs are a tax to deter a U.S. consumer from buying a commodity from overseas rather than a direct financial cost to Canada, China or Mexico. How quickly or slowly will it be before an effect that the exporters in those countries feel? His message indicates the applications would be an across the board on all products which would be a de facto radical shot at trade between us and our top three trading partners so the impact might be relatively quickly. Tariffs would not end the import of the goods, instead making purchases considerably more expensive from China and much more costly from Canada or Mexico than they are right now.

Using these tariffs also implies absolute power on the part of Mexico City, Beijing, and Ottawa to control these behaviors by actors within their borders. While Xi Jinping aspires to control everything in China, it’s not always clear he does that successfully. Ottawa and Mexico City are capitals of free market economies where the state’s power to curb illegal activity, especially if under the radar, may not exist as fully as either government—or Washington—would like to believe. Particularly in the Mexican case where the narcotraficante cartels operate as shadow states within the federal system makes this more delicate, if deadly as well. Trump is consistent in his belief that these governments have the power to end illegal migration which the tariffs instantly if we induce that forcefully to rid the actions once and for all.

Again, the fentanyl issue apparently applies to all three countries, although the exporter most often blamed for this deadly chemical is China. I suspect the president-elect notes links the three countries on the premise that the deadly substance is a bad thing coming into this country so it must be coming across a porous border but I am hypothesizing here.

He certainly built a reputation for charging that Mexico sends whatever it doesn’t want into this country. I suspect he is again extrapolating that the northern border must be as open to this trafficking because it comes across the southern border. I am aware that concerns spiked earlier this year about Chinese migrants coming into the country illegally from Mexico so that probably is why he is bundling these three states with this unique use of tariffs against the three.

Another question bound to arise is whether these states have anything for which they can similarly use tariffs against us? Mexicans have long argued that the vast pool of fire arms from the United States destabilizes their country where stricter legislation on fire arms ownership. I suppose President Claudia Sheinbaum could impose a tariff on the United States to demand we stop guns from flooding south but it seems unlikely for the same reasons that our use of the tool may not work immediately.

The new president may only be offering a salvo two months before taking office to warn these other states of his determination to end these scourges. Once in office, it’s possible he could rescind the tariff threat, although that seems inconsistent with steadfast dedication to preventing illegal entries of people and abusive substances above any other concerns. The use of tariffs is an instrument the president-elect referred to repeatedly in his campaign. He firm commitment to the idea of America First means he is unfazed by the existing legal agreements under the World Trade Organization (which consider tariffs out of bounds in most cases) or the North Americans Free Trade revision signed during his earlier term. His is an obvious commitment to prioritizing the problems in America here and now over the much cited liberal international order we so often accuse China of undermining. I suspect, like the deportations he has announced, this is truly a top priority for him.

Tariffs will do nothing to lower the cost of living that so many voters complained about before the election. Tariffs almost always fuel inflation because they drive up the cost of purchasing a product. If applied as announced, this would be a 10% increase in the cost of anything brought in from China and a whopping price increase by a fourth for Canadian or Mexican goods. Those expenses will hurt consumers but the president-elect believes that the dangers posed by immigrants and fentanyl will be more relevant to the consumers than the extra costs. Alternatively, he may be correct that consumers will stop buying products from those countries altogether en lieu of paying the inflated amounts. I certainly don’t know consumer spending patterns well enough to predict.

The use of tariffs as a tool beyond protecting an industry is an expansion of a non-military instrument of statecraft. Public policy is one of the most apparent instances of actions and consequences. The newly-elected president is avowing his determination to address a policy danger he views above any others. Voters commonly become disillusioned with a leader who does not carry through on promises so this should be quite interesting for all of us in wrestling under this mechanism.

Be well and be safe. FIN

Ana Swanson, Matina Stevis-Gridneff, and Simon Romero, “Trump Plans Tariffs on Mexico, Canada and China that Could Cripple Trade”, NewYorkTimes.com, 25 November 2024, retrieved at https://www.nytimes.com/2024/11/25/business/economy/trump-tariffs-canada-mexico-china.html