While it might do more damage to Canada and Mexico than the US, it will cause immense disruption to US industry, particularly the auto, agricultural and oil refining industries. It will add to the US inflation rate, increase the jobless rate and subtract from America’s economic growth rate.
Tariffs are a tax on consumers. Trump’s tariffs are a tax on US consumers – the duties are paid by the importer and the border not, as Trump in his wilful ignorance continues to assert, by the exporter.
Canadian Prime Minister Justin Trudeau hit back with tariffs on US goods. Credit: AP
Trump wants the trillions of dollars of tariff revenues his advisers claim his tariffs will raise – his Treasury Secretary, Scott Bessent, has claimed than will raise between $US2.5 trillion and $US3 trillion over a decade – to pay for the extension and expansion, at a cost of about $US4.6 trillion over a decade, of the tax cuts for companies and the wealthy he enacted in 2017.
So, in order to fund those regressive tax cuts, Trump has declared war on economies that have been parties to a free trade zone for more than 30 years; on industries that have constructed supply chains that are highly dependent on the free trade between the US, Mexico and Canada, and on the lower income households who helped re-elect him.
The industry arguably most impacted by the tariffs is the US auto industry, which has complex and highly integrated supply chains across both the northern and southern borders.
Mexico accounts for about 42 per cent of all auto parts shipped into the US and Canada at least 13 per cent, with some parts criss-crossing the orders half a dozen times, or more. The effective rate on those components would be multiples of 25 per cent.
Trump’s deployment of tariffs is based on an obdurate unwillingness, or inability, to accept how they actually work.
It would take years for the US carmakers to reconfigure their operations to avoid the tariffs. Meanwhile, prices will go up to reflect the tariffs and profits, investment and jobs will be lost on either side of the borders, albeit probably more of them in Mexico and Canada than in the US.
Similarly, even though Trump has imposed “only” a 10 per cent tariff rate on oil imports from Canada, US refiners will be hit. Almost all Canada’s oil exports are to the US which, despite being a net exporter of oil, imports heavier crude grades from Canada that its domestic industry can’t supply.
About 60 per cent of all US oil imports are from Canada and there are refineries, particularly those in America’s Midwest, that have been designed specifically for Canada’s heavier oils and which can’t readily be converted to accept imports from other producers. Tariffs on Canadian oil mean higher gasoline prices in parts of the US.
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When Trump imposed tariffs on imports from China in 2018 he targeted about $US360 billion of China’s exports to the US. The tariffs he announced at the weekend cover about $US1 trillion of imports, providing an indication of how much more impactful they will be, even if the confrontation doesn’t escalate as Canada and Mexico respond.
Those earlier tariffs on China are estimated to have added about a tenth of a percentage point to US inflation and had twice that impact in reducing US GDP.
The US Tax Foundation has estimated that the new tariffs on Canada, Mexico and China will have double the impact on US GDP of the earlier tariffs on China and a full-blow trade war with the rest of the world, as Trump has promised, more than six times their impact at 1.3 per cent of US GDP – before taking into account any retaliation.
That’s why the Wall Street Journal called Trump’s actions, undertaken on the flimsiest of pretexts and without any real understanding of the consequences, the dumbest trade war in history.
His tariffs, unprovoked by anything trade-related that Canada, Mexico or even China have done, will cause chaos and disruption to US industry, higher prices for consumers and/or lower profits for US companies, subtract from US growth and add to inflation and interest rates.
The tariffs have sent a shiver through global markets. Credit: Bloomberg
It will also — although this doesn’t seem to concern Trump — fracture America’s relationships with its closest allies and force them to create new trading blocs with countries that America would consider its foes, most notably China.
Trump’s deployment of tariffs is based on an obdurate unwillingness, or inability, to accept how they actually work.
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As they bite, the effects of his willingness to start a trade war against America’s most important trading partners will gradually show up and, as Americans are confronted by higher prices and/or reduced access to products they are used to buying, the price and pain of that ignorance will be revealed. Unhappily, the rest of the world will share their pain.
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