Trump is so desperate to show progress on the immigration front that’s he’s prepared to harm US consumers and the economy in a big way to do so. As many of you have heard via lead story coverage, Trump has said he will impose 25% tariffs on Canada and Mexico and 10% more on China his first day if the US neighbors don’t stop illegal border crossings, and China, crack down harder on fentanyl:
Trump says he will implement a 25% tariff on Canada and Mexico on "ALL products coming into the United States" on his first day taking office. pic.twitter.com/lqt4AynhDN
— Kaitlan Collins (@kaitlancollins) November 25, 2024
Note that Nick and I have overlapping posts today, but the focuses are different. Nick looks at the impact on Mexico, Canada, their trade deal and the relations among them, while the focus below is mainly on the effect on the US.
Mind you, we pointed out earlier that Trump has a comparatively easy way to make a lot of progress on immigration quickly, which is going after employers. Making an example of a big but not critical miscreants like Marriott and then conducting a few regional raids on employers in other industries would focus a few minds. But Team Trump apparently does not want to cross swords with US businesses; he’d rather pressure others to do his dirty work.
But instead, Trump is fond of grabbing blunt instruments and breaking china rather than solving problems. This is one of those occasions where conventional wisdom is correct. Whether or not you think a big reduction in immigration is a good idea (as in what side you are regarding US worker costs), these proposed tariff increases will push up inflation without doing much to achieve Trump’s aims. The best hope here is that the “Trump is a madmad” performance will lead Canada and Mexico come up with sufficient optics to make Trump able to declare a win, regardless of what actually happens. But could or would either country be able to engage in appeasement theatrics on a fast enough timetable?
Below we’ll provide some hot takes on the Trump scheme. Perhaps readers can also provide examples of expected effects in their industries.
“Stiff new tariffs on imports from the US’s three largest trading partners would significantly increase costs and disrupt business across all economies involved,” said Erica York of the Tax Foundation, a Washington-based think-tank. “Even the threat of tariffs can have a chilling effect.”
Reuters points out that if Trump acted on his threat, it would violate agreements with Mexico and Canada:
Trump, who takes office on Jan. 20, said he would impose a 25% tariff on imports from Canada and Mexico until they clamped down on drugs, particularly fentanyl, and migrants crossing the border, in a move that would appear to violate a free-trade deal.
The Wall Street Journal elaborated on the treaty issues:
The threatened tariffs on Mexico and Canada are the bigger surprise, and suggest Trump is eager to reopen the U.S.-Mexico-Canada Agreement, a free-trade accord that came into force in 2020. The USMCA replaced the decades-old Nafta pact, which Trump repeatedly described as the “worst trade deal ever made” for widening the U.S. trade deficit and costing America millions of manufacturing jobs, especially in the auto sector.
The tariff threat suggests Trump is seeking to include immigration, security and drugs in a negotiation that usually revolves only around trade, as well as accelerate a planned review of the USMCA scheduled for 2026, said Alberto Villarreal, managing director of Nepanoa, a Chicago-based consulting firm that provides services for companies wanting to set up shop in Mexico.
“If Trump follows through with imposing immediate and unilateral tariffs, this would mean ‘going nuclear’ on USMCA,” he said.
Tight economic links between the U.S., Canada and Mexico mean that disrupting trade with tariffs would have far-reaching effects.
BBC reminded readers of an additional Trump threat, of ending China’s most favored nation status with the US. However, since this was codified by treaty, as in approved by Congress, it would not appear that he has the power to revoke most favored nation status on his own:
The Canada and Mexico tariffs would hit both countries’ exports hard, as well as damage US manufacturers who use Mexico as a production center for the US. Reuters again:
The U.S. accounted for more than 83% of exports from Mexico in 2023 and 75% of Canadian exports.
The tariffs may also spell trouble for overseas companies like the many Asian auto and electronics manufacturers that use Mexico as a low-cost production gateway for the U.S. market.
A quick look in search provides estimates that Mexico’s exports of goods and services in the 36% to 43% range, and for Canada, 34%.
Note that China may be getting a relative break. From CNBC:
A 10% tariff on China is lower than the 20% to 30% that markets expected, Kinger Lau, chief China equity strategist at Goldman Sachs, said Tuesday on CNBC’s “Squawk Box Asia.” He expects China will cut rates, increase fiscal stimulus and moderately depreciate its currency in order to counter the economic impact of increased duties.
Even though the projected inflation impact may not seem dramatic:
A 25% across the board tariff on Canada & Mexico imports is basically an 0.6% increase in inflation or ~$950 additional annual tax on every American household. Housing & home remodeling prices are going to explode. Produce too.
— Just 1ncent1ve (@1ncent1ve) November 26, 2024
Or perhaps it will be, but this study almost certainly does not allow for substitution:
Researchers have warned that another major round of tariffs would risk another spike in inflation in the US.
Think tank "Centre for American Progress" predicted that a middle-income family would have lose $2,500 to $3,900 each year due to Trump's Tariff.
https://t.co/iPeL0moibV— Kite🪁 (@MayMayln) November 26, 2024
Some Twitterati are contending that Trump’s past tariffs didn’t increase inflation. Others say that was because they were limited:
Context matters with #tariffs. Trump's previous tariffs targeted specific industries in order to raise prices. That is fine. Blanket tariffs when inflation is already a concern will raise the price of consumer goods drastically. Tariff – Wikipedia
— Mirror (@Mf99k) November 26, 2024
And as you may recall from the Financial Times chart above, another mitigating factor was the shift of imports from China to Mexico.
It will hit fuel prices, which are a sensitive category since consumers pay for gas regularly and the impact on lower income groups is disproportionate:
if you take Trump's threat to put a 25% tariff on all Canadian goods seriously, one of the first results would be an immediate increase in gas prices, especially in the midwest—Canadian pipeline-transported crude feeds key refineries throughout the US pic.twitter.com/hbKXFXGtOa
— Joey Politano 🏳️🌈 (@JosephPolitano) November 26, 2024
They would also hit food prices, visible both to consumers at stores and through restaurant prices (although they try to adapt via menu changes):
Trump just promised to tariff America's largest agricultural trading partners.
Here's a list of groceries you can expect to significantly increase in price after Trump takes office. https://t.co/w1JsPBcBfq pic.twitter.com/uFx0ppGUGj
— Joshua Reed Eakle 🗽 (@JoshEakle) November 26, 2024
The Journal, in the article cited above, listed other products that would see considerable increases, particularly cars. Note the point about administrative complexity by some supply chains being hit with tariffs multiple times:
Tariffs would likely drive up the price of steel and aluminum in the U.S. because Canada and Mexico are major suppliers of those metals to the U.S. market. The U.S. also buys almost all of Canada’s oil.
U.S. automakers including General Motors and Ford Motor have spent decades planning their factory footprints around free trade between the three countries. About 16% of vehicles that will be sold in the U.S. this year will have been built in Mexico, or roughly 2.5 million cars, trucks and SUVs, according to a forecast from research firm Wards Intelligence. Vehicles manufactured in Canada will account for about 7% of U.S. sales.
Tariffs could hit the automotive supply base hard, potentially pushing up prices in the U.S. Hundreds of parts suppliers operate in Mexico, feeding both local factories and U.S. plants. Some parts cross the border several times in various stages of production before landing in a finished vehicle, said Mark Barrott, head of the automotive and mobility practice at consulting firm Plante Moran.
And we have not even gotten to retaliation by Mexico and Canada.
Let us not forget Mr. Market. If Trump goes ahead, the dollar will rise (as it has a bit already) due to the expectation that the Fed will increase interest rates to try to tamp down inflation. Mr. Market does not like higher rates. And banks may be wrong-footed badly again, by making longer-dated bond investments again on the expectation that the trend to lower interest rates was baked in.
Scott Ritter, in his latest Judge Napolitano talk, made some embittered remarks about Trump engaging in a bait and switch by promising dis-engagement from Ukraine, as in de-escalation, yet naming some particularly retrograde Russia hawks to his team. Ritter opines that Gorka’s remarks make it impossible for Putin to talk to Trump:
Trump’s newly appointed counterterrorism adviser Sebastian Gorka calls Putin a “thug” and says Trump plans to end the Ukraine war by threatening to flood Ukraine with military aid, making current U.S. support look like “peanuts” pic.twitter.com/jKkfmmzvoK
— jeremy scahill (@jeremyscahill) November 25, 2024
We look to be seeing a similar bait and switch on the inflation front. There was admittedly always tension between Trump’s promises to end illegal immigration and curb inflation. Many though these plans had a lot of hot air in them, since Trump would not want to unduly discomfit a traditional Republican constituency, of small to mid-sized business operators and thus would not go all that far in his immigration curbs. But the Mexico-Canada tariffs came out of left field and look to be a clear economic net negative for the US, and even more so for many consumers.
Trade wars are good and easy to win.
— President Trump in 2018
When you are playing 4D chess, you are always a legend in your own mind.
well, we are in an atypical time in which the EU and China and Japan have (arguably structural) domestic demand problems.
The US is the most creditworthy consumer left standing. They need us (to keep the factory running), we need them (to keep inflation reasonanle, and take some federal debt).
PS, regardless, shock therapy is bad.
Trump’s introducing tariffs, so inflation will not be reasonable. Heck, even without tariffs, prices have gone up a ridiculous amount after Covid. Inflation going down just means that prices are not increasing as fast as before, but they are still rising.
I agree,in order to keep the aura of “Full-Spectrum Greatness,” the US keeps creating money to inject into the economy in order to pump it up. The math is interesting, it takes about 9% of GDP in pumping in order to create about 2.8% in GDP growth. It’s not free, 90-day US T bills are at 4.43% and Canadian ones are at 3.5%, so the US is paying a bit of a premium for its ability to need so much credit. With the national debt over $36 trillion, each 1% increase in interest rates eventually means $360 billion in interest payments.
Re Trump’s newly appointed counterterrorism adviser Sebastian Gorka. It is disturbing the number of believers of Project Ukraine that Trump is bringing on board. However, and this is a big however, is the military aid even there? Weapons stocks for the Pentagon are running low and they will not see them totally depleted for a lost war. Even if weapons were sent, the Ukrainians no longer have the soldiers to use them or the time to train them. Some of these Trump neocons have even been boasting how the US killed scores of Russian mercs in Syria so of course Putin will buckle to Trump’s threats. So I’m thinking that when Trump’s team negotiates with Mexico and Canada, it will be with this extreme level of arrogance with no thought of blowback or consequences. For them, any negotiations must end in the US getting everything that they want. Anything else is not acceptable.
Trump is trying to tank the economy. That’s why he is posting on social media about tariffs today. This is the economic hardship he and his advisors promised would be inflicted on Americans. He wants to crash the markets before he officially takes office.
Ben Meiselas 🇺🇸🦅
@meiselasb
gold, bitcoin, nvidia tanking
Stonks not tanking.
Tariffs and sanctions on Mexico and China at the same time seems like a great reason for them to realign their trade to each other. Mexico is basically the only country in Latin America that doesn’t have China as its largest trade partner. Arbitrarily breaking NAFTA seems like a great reason for Mexico to get on the bandwagon. Mexico also has the domestic manufacturing capability built under NAFTA to quickly take on Chinese investments and sell to the rest of Latin America. Is there a location to build a nice deep water port on the Pacific side of Mexico?
Ten years down the line, Mexico may well have better infrastructure and far nicer electric cars than the gringos up north
“We look to be seeing a similar bait and switch on the inflation front.”
Exactly, regardless of how you feel about the tariffs they are overwhelmingly inflationary as is clamping down on illegal immigration and more specifically their employment and the role that played in wage suppression. You can think these goals are worth running inflation hot for a while, that’s at least a coherent argument with realistic pros and cons. Trump has basically told his voters they can have their cake and eat it too. Jury’s still out if this is all empty rhetoric, he really plans on following through, or perhaps he follows through and immediately walks most of it back while trying to save face. We’ll all find out soon enough.
Personally, I recently bought a house (was somewhat forced into it) with a substantial mortgage attached to it this year. I am well insulated against inflation, and wouldn’t exactly be sad to see some of that mortgage debt inflated away. Doubly so if Trump leans on the Fed to get a rate cut or uses some other method to lower mortgage rates, even if briefly so long as the rates stay low long enough to refinance. Everyone needs a survival strategy.
Making an example of a big but not critical miscreants like Marriott and then conducting a few regional raids on employers in other industries would focus a few minds. But Team Trump apparently does not want to cross swords with US businesses; he’d rather pressure others to do his dirty work.
It doesn’t take a big imaginative leap to see this as the start of a shakedown aimed at employers. Pay off to Donnie & Co. and we’ll leave your business alone, undocumented workers and all. Anyone who doubts this can read a history of Prohibition in the US.
Sorry, selective crackdowns, particularly of companies with brand names or local reputations, will have an impact. And part of the enforcement would be done through the IRS, so you’d have an independent bureaucratic check.
The last time Trump merely made noise, I heard of several large grocers quickly dumping their immigrant cleaners and stockers.
How much of the new tariff talk is a signaling device? Threaten something and get a desired reaction, prior to any actual collections?
Blunt instrument approach, crude and will see how effective as Mexico, Canada and China react.