Trump Declares Trade War on North America
Christopher Padilla
Former technology executive; former government official; non-profit board member; part-time consultant; full-time dad, husband, and dog walker.
Today, President Trump declared an "international emergency" under the International Emergency Economic Powers Act and imposed 25% across-the-board tariffs on Canada and Mexico (10% for oil) and an additional 10% tariffs on China.
Yesterday, I listed five questions I would be looking at concerning the potential imposition of new tariffs on Canada, Mexico, and China. Here are the answers based on what we know as of Saturday evening, followed by some quick takes on today's action.
1. Does it happen, or is some last-minute deal announced regarding border security and fentanyl?
- It's not clear whether any commitments by Mexico and Canada commitments would have averted these tariffs, nor do we know if further promises will result in the removal of the tariffs. The President likes tariffs, wanted to impose some, and has done so.
2. If tariffs are imposed, do they take immediate effect, or are they just “announced” with a delay in effectiveness and collection?
- Reports indicate tariffs will begin to be collected at U.S. ports starting on Tuesday, February 4.
3. Are the tariffs universal, or will they apply only to certain goods?
- The tariffs are universal, applying to every commodity crossing the border. Oil tariffs will be 10% rather than 25%.
4. Will there be any exception process?
- There is no word on any exception process at this point.
5. If IEEPA is used, how quickly will the business community challenge the tariffs in court and seek an injunction?
- There are reports that various U.S. industry groups are prepared to file a lawsuit challenging using IEEPA to impose these tariffs. Prospects for such a lawsuit are not promising, given the President's broad authority under IEEPA and the reluctance of courts to second-guess a Presidential determination of an "international emergency."
Here are some quick takes on today's action:
- According to the Tax Foundation, these tariffs amount to a $1.2 trillion tax increase over the next ten years. Unlike the tax increases in Obamacare or the 1986 tax reform, which were focused on specific groups or income levels, these tariffs will impact everyone in the United States, making this one of the largest and broadest tax increases in recent U.S. history.
- The Tax Foundation estimates that these tariffs will shrink U.S. GDP by 0.4 points and cost the average household at least $830.
- Today's action will impact the U.S. economy much more than the 2018-19 Trump tariffs on China, which applied only to a subset of traded goods and was focused on intermediate products (inputs to U.S. manufacturing). This action, by contrast, will hit consumer products and apply to every commodity crossing the border.
- Those who believe these tariffs are just meant to provide "negotiating leverage" should remember that not a single tariff imposed by President Trump was removed during his first term, even after "deals" were reached. For example, all the Trump tariffs remained in place despite a much-touted purchasing and market access agreement with China. These new tariffs are not likely to be quickly removed.
- The inflation effects of these tariffs will be significant. The tariffs will put price pressure on countless goods, especially fruits and vegetables, electronics, lumber, autos, and energy. Prices will rise at the grocery store, the gas station, the Best Buy, and the auto dealership, probably reasonably soon.
- Because these tariffs are indiscriminate, they will damage manufacturing in the United States in the short term, particularly in the highly integrated auto sector, where inputs will become much more expensive or unavailable.
- Wall Street was overly complacent, convincing itself that President Trump would only use tariff threats as negotiating leverage. Now that we know tariffs will be significant, indiscriminate, and non-temporary, financial markets must re-evaluate some key assumptions. For example:
The Fed is likely done with rate cuts for the foreseeable future and may need to raise rates before the end of this year. Inflation has been stubborn and will be significantly aggravated by these tariffs and the prospect of more, combined with labor market pressure from increased deportation efforts.
Higher-than-expected interest rates mean that mortgage and consumer credit rates will not come down, which will have attendant negative effects on the housing market and consumer spending.
Due to higher tariffs and interest rates, the dollar will remain strong and probably get stronger. A strong dollar, plus possible retaliation by foreign countries to U.S. tariffs, will pose challenges for export-oriented sectors such as aerospace and agriculture.
A rising dollar and possible foreign retaliation will hurt U.S. multinationals heavily dependent on overseas sales. Technology, auto, and consumer goods companies will face currency headwinds on earnings and sales that will worsen in 2025.