Tariffs latest in barrage to halt spending, boost prices, crush profits, kill jobs
(Originally published Feb. 3 in “What in the World“) U.S. President Donald Trump launched a global trade war, imposing tariffs on America’s three largest trade partners—Canada, China, and Mexico—and threatening them against Europe and the United Kingdom.
Canada and Mexico said they would respond with retaliatory tariffs on U.S. imports. Canada will tomorrow begin charging 25% tariffs on a wide range of U.S. products. Mexico has not yet announced what its tariffs will be, but Mexican President Claudia Sheinbaum is reportedly planning to announce tariffs on specific products made in constituencies that typically vote for Trump’s Republican Party. China said it would also take unspecified countermeasures.
Trump on Saturday imposed 25% tariffs on imports from Canada and Mexico, and added a 10% tariff on Chinese imports, which were raised by former Pres. Biden range to between 25% and 100% depending on the product. Imports of Canadian oil and gas will enjoy a lower, 10% tariff. Trump said Sunday tariffs were also in store for Europe and possibly for the United Kingdom.
The U.S. dollar rose and futures contracts for the benchmark Dow Jones Industrial Average fell roughly 1% Sunday, offering a preview of how markets are likely to react when they open today. The tariffs affect roughly $1 trillion worth of goods, more than a third of all U.S. imports. Former U.S. Treasury Secretary Lawrence Summers predicted that the tariffs would push inflation higher and slow economic growth, as the tariffs force companies to raise prices and a greater portion of consumer spending—the U.S. economy’s main growth engine—flows into government coffers instead of the private sector. Higher inflation could convince the U.S. Federal Reserve to hold interest rates steady, confounding investor hopes for it to continue a series of rate cuts. “This is a self-inflicted wound to the American economy,” Summers said in an appearance on CNN.
The tariffs are likely to have two potentially positive impacts on the U.S. First, higher costs for imports will likely result in a 15% decline in imports. Second, the tariffs on imports that keep flowing will generate $100 billion a year in additional money for the U.S. government. But those benefits are likely to be more than offset by the additional cost to consumers and to corporate profit margins, as well as the resulting loss in jobs.
The tariffs on Canada and Mexico appear to violate the 2020 United States-Mexico-Canada Agreement, and could thus be challenged in U.S. courts along with Trump’s moves to supersede Congressionally approved government spending. Trump based the tariffs on the 1977 International Emergency Economic Powers Act, which empowers the President to regulate trade in response to a national emergency. Trump has labelled illegal immigration and fentanyl imports a national emergency and blamed Canada, China, and Mexico, for abetting both.
Beyond its direct economic harm, Trump’s absurd tariff salvo also appears to serve little strategic value. The tariffs in themselves are unlikely to achieve their stated objective of reducing the flow of illegal immigrants or fentanyl, since they don’t target those imports and both Canada and Mexico have already said they’re working to help interdict them. It’s also unclear what Trump’s conditions are for reversing the tariffs, meaning that they are also likely to fail as a negotiating tool. Their economic damage, however, is likely to be tangible and abundant.
Trump seems to have simultaneously declared war on the U.S. economy, however. Though the White House reversed an order to freeze government aid and grants, Trump has still blocked tens of billions of dollars of spending on any projects related to climate change. Meanwhile, his political donor, Elon Musk, has vowed to cancel hundreds of millions of dollars in government grants after U.S. Treasury Secretary Scott Bessent on Friday granted Musk access to the department’s payment system. Musk holds no official Cabinet position. Trump has appointed him head of the White House’s unofficial “Department of Government Efficiency,” which is not a government department.
Apart from the impact broad and possibly illegal blocks on government spending will have on the economy, Trump’s policies are already causing institutional chaos.