Trump trade war: 25% tariffs on goods from Canada and Mexico, 10% on goods from China

San José, CA – On Saturday, February 1, Trump continued his flurry of executive orders, this time targeting trade with Mexico, Canada and China. Unlike Trump’s first term in office, where he targeted imports of intermediate goods - that is, manufactured goods that are used to make other goods, like steel - these are broad tariffs covering all goods, from raw material like crude oil, to intermediate goods, to final goods that are sold to consumers, like cell phones.

Together Canada, China and Mexico are about 40% of the United States’ total trade, so that this is the biggest increase in tariffs since the Smoot-Hawley tariffs of 1930. Those tariffs and other countries’ responses made the worldwide economic recession even worse and were a factor in turning a bad recession into a depression. Economic studies show that Trump’s tariffs could push Canada and Mexico into recessions, while economic growth and employment would slow, and prices rise in the United States.

The immediate impact will be higher prices here in the United States. Some of it is predictable, as imported maple syrup from Canada and imported tequila from Mexico go up in price because of these taxes on imports. Other fruits and vegetables like avocados will also become more expensive, raising grocery prices even more.

Gas prices could go up, not only in the Midwest and Gulf Coast, where U.S. gasoline refineries rely on imported oil, but also in places like California that uses imported Canadian oil. Car production will be hit too, as many cars sold in the United States, including U.S. brands such as Ford and GM are either produced in Canada or Mexico and/or use parts made in our two neighboring countries.

The biggest burden of Trump’s tariffs, estimated to be about $830 per household, would be on lower income households.Lower income folks would lose about four times as much of their purchasing power as those in the highest income households. This fall in purchasing power would lower demand for goods and services and slow economic growth and job creation.

But these estimates only count the direct cost of tariffs. There are two types of indirect costs. First of all, U.S. producers could maximize their profits in the short run by raising their prices.This is what happened when Trump slapped 25% tariffs on steel in his first term – U.S. steel producers raised their prices by 22%, padding their bottom line, but causing even bigger overall price increases.

The second type of cost to Americans is retaliation by other countries. The prime minister of Canada has ordered 25% tariffs on more than a $100 billion of imports from the United States in retaliation. Mexico’s president ordered her economy minister to prepare both tariff and non-tariff responses to Trump’s tariffs. The Chinese Ministry of Commerce said that China will file a complaint with the World Trade Organization or WTO and take “countermeasures” against the United States.

China is actually better positioned than either Canada or Mexico because it has been able to diversify its trade away from the United States since Trump’s first term in office. Both Canada and Mexico send 70% or more of their exports to the United States. However, China’s biggest export market is now ASEAN, the Association of Southeast Asian Nations (Vietnam, Cambodia, Laos, Malaysia, Singapore, Philippines, Thailand, Myanmar, Brunei and Indonesia), with the European Union not far behind the United States.

While Trump has threatened to increase tariffs if any of the countries retaliate, an escalating trade war could push Canada and/or China to “go nuclear” by putting export taxes or restrictions on key exports such as oil from Canada or rare earth metals from China. In the long run, both Canada and/or Mexico could follow China’s path and try to reorient their trade to Asia, Europe and Latin America.

Trump’s tariffs are moving the United States to “decouple” its economy from the rest of the world. This response to the relative decline in U.S. economic power, from 40% of world GDP afterWorld War II to only around 15% today (as measured by “purchasing power parity,” which compares the actual prices of goods and services). However, these tariffs, along with Trump’s escalating deportations, and anti-education and anti-health moves, will just accelerate the rate of U.S. decline.

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