“World War T” - Trump, Tariffs and Trade

San José, CA – At the stroke of midnight on Tuesday morning, President Trump’s trade war was launched against the three largest trading partners of the United States. Canada and Mexico were hit with across the board 25% tariffs, with the exception of Canadian energy products: oil and electricity, which were given 10% tariffs. China was hit with an additional 10% tariff, bringing the total rate to 20% with the initial 10% tariffs back in February.

Canada immediately hit back, with tariffs on $30 billion (Canadian) or about $20 billion U.S., with tariffs on another $125 billion (Canadian) or about $80 billion U.S. of U.S. goods, to go into effect in three weeks. China also hit back, putting 10-15% tariffs on U.S. agricultural exports, to go into effect March 10. Mexico’s response was more subdued, with the Mexican president saying that she would announce their response on Sunday, March 9.

While the immediate counter-tariffs were somewhat restrained, as both Canada and China would like further talks, the Canadian Prime Minister and the Chinese representative from the Foreign Ministry used very strong language.

Prime Minister Trudeau of Canada described Trump’s tariffs as an existential threat to the country, saying the tariffs are designed to cause “a total collapse of the Canadian economy because that will make it easier to annex us” referring to Trump’s repeated desire to make Canada a 51st state. Public sentiment in Canada has turned anti-American, with Canadian hockey fans booing The Star-Spangled Banner when it played at a professional hockey game in Canada. China’s foreign ministry representative also used strong language, saying “if war is what the U.S. wants, be it a tariff war, a trade war or any other type of war, we’re ready to fight till the end.” 

The immediate impact of the tariffs will be to cause a logjam of imports and exports at the U.S. borders with Canada and Mexico. While many Chinese goods have been placed under tariffs since Trump’s first term, most goods crossing to and from Mexico and Canada largely had no tariffs and imposing them will be a logistical nightmare. This will lead to shortages, somewhat like the early days of the COVID pandemic, which also disrupted trade.

The second impact will be higher prices. Some of these price increases have already started. Others will show up in days. The amount that consumers will have to pay will vary by product. If there is a lot of competition in terms of other countries making the item, as in the case of shoes, the 20% tariffs on China will mean about an 8% increase in prices. More expensive products sold to people willing to pay more will see a larger pass-through to the consumer, such as iPhones, which could rise 15% in price. Finally, where there are almost no alternatives, such as avocados from Mexico, the 25% tariff could mean a 20% jump in prices.

One of the most expensive goods to be hit with tariffs will be automobiles, where U.S, Japanese and German corporations have factories. Here prices could rise by 15% or more, with the 25% tariffs on Mexico and Canada. Over the last 30 years these car corporations have built integrated supply chains spanning all three countries in the wake of the NAFTA free trade agreement. Many auto parts cross the border many times, meaning that the 25% tariff might be applied not once, but multiple times.

Not only will the tariffs raise prices, they threaten economic recessions in Canada, Mexico and even in the United States. While the United States is less dependent on trade than Canada and Mexico, the Federal Reserve Bank of Atlanta revised their estimate for U.S. Gross Domestic Product for the first three months of the year down to a negative 3.5% growth. This sharp drop in production, while not officially a recession, would typically be seen in a recession. 

To make matters worse, Trump is planning for even more tariffs. On March 12, Trump will put 25% tariffs on steel and aluminum. Trump has said that, on April 2, he will start tariffs on cars, medical drugs and semiconductors. Trump also plans to announce matching tariffs for every country, as his team is searching for foreign taxes that they could label as tariffs.

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