Trump’s Trade War Has Begun

Despite a 30-day reprieve and sincere efforts by our trading partners to meet Trump’s demands, he imposed across-the-board tariffs anyway.

It was a perfect encapsulation of the chaos that Trump has wrought. As he announced yesterday that he was going to proceed with 25 percent tariffs against Canada and Mexico and hike another 10 percent on China, a widget on the Fox Network showed the Dow Jones crashing in response.

By the end of the day, the Dow had erased over 600 points as investors braced for economic impact. Then last night, Trump rolled the dice, allowing the new tariffs to go into place, citing a failure by our trading partners to control the flow of fentanyl.

That was a red herring, of course. Trump wants something to point to in order to demonize our biggest trading partners. Now American consumers will suffer. And U.S. exporters also are about to see tens of billions in retaliatory tariffs. The pain will likely only grow from there.

The impact on consumers

Unless Trump reverses himself, expect prices to rise on pretty much everything. China, Canada and Mexico provide most of the manufactured goods, raw materials and agricultural products imported by U.S. companies. Cars, cell phones, computers, tequila, fresh vegetables and fruit, gasoline—nearly everything we buy will see an impact, on top of the already high price of eggs.

Across-the-board tariffs means importers will either need to absorb those extra costs or pass them along to consumers in the form of higher prices. And as the cost of imported products rise, it will be tempting for U.S. companies to raise domestic prices as well in order to take advantage of the surge in inflation and pad their profits.

At least, that’s how most economic experts see it. Not so the White House. In February, Trump acknowledged that his new tariffs could cause “some pain” but insisted our trading partners, and not U.S. consumers, would bear the brunt of it. Similarly, Trump’s top trade advisor, Peter Navarro, who recently went to prison for refusing to testify before Congress about January 6, claimed on Monday that inflation from tariffs would be “second-order small.”

The U.S. imports over $900 billion annually from Canada and Mexico, so it’s hard to see how a 25 percent hike would only produce small amounts of inflation. Indeed, most economists and studies show that the effect will be noticeable and widespread.

“Because of the combination of these three countries, it’s going to be difficult to go down an aisle of a grocery store and not see some sort of inflationary effect,” Jason Miller, a professor of supply chain management at Michigan State University, told the New York Times.

The impact on exporters and manufacturers

There’s a flip side to U.S. tariffs: our partners’ retaliatory ones.

China, Canada and Mexico have all been preparing for the possibility that Trump would do just this, though they tried hard to dissuade him from this course, including expending considerable energy, with notable success, in reducing fentanyl flows across the border.

For Canada, this is particularly frustrating because it doesn’t really have a fentanyl border smuggling problem to begin with. As the Times reported,

Just 19 kilograms of fentanyl were intercepted last year at the Canada-U.S. border, compared with almost 9,600 kilograms at the border with Mexico, according to U.S. Customs and Border Protection. And an investigation by The Globe and Mail, a newspaper in Toronto, found that the Canadian figure was inflated by the inclusion of seizures that were not related to the border.

Prime Minister Justin Trudeau said in a statement,

“Today, after a 30-day pause, the United States administration has decided to proceed with imposing 25 per cent tariffs on Canadian exports and 10 per cent tariffs on Canadian energy. Let me be unequivocally clear – there is no justification for these actions.”

He went on to lay out what Canada planned in response.

Should American tariffs come into effect tonight, Canada will, effective 12:01 a.m. EST tomorrow, respond with 25 per cent tariffs against $155 billion of American goods – starting with tariffs on $30 billion worth of goods immediately, and tariffs on the remaining $125 billion on American products in 21 days’ time. Our tariffs will remain in place until the U.S. trade action is withdrawn, and should U.S. tariffs not cease, we are in active and ongoing discussions with provinces and territories to pursue several non-tariff measures.

Other Canadian politicians are reacting with outrage to Trump’s imposition of tariffs. Ontario Premier Doug Ford warned, “If they want to try to annihilate Ontario, I will do everything — including cut off their energy with a smile on my face.” He continued, “They rely on our energy, they need to feel the pain. They want to come at us hard, we’re going to come back twice as hard.”

Premier Ford added that Michigan auto plants would likely shut down within a week and that he would halt nickel shipments and cross-border transmission of electricity from Ontario to the U.S. “I’m going after absolutely everything,” Ford said.

In contrast to Canada, Mexico’s President Claudia Sheinbaum had taken a cautious approach, continuing to make a strong case against tariffs and even endeavoring to prove her country is doing everything possible to allay Trump’s asserted concerns. As the Associated Press reported, last week Mexico turned over 29 drug cartel figures to the U.S. and dismantled over 100 drug labs of the Sinaloa Cartel. But these efforts were brushed aside by Trump as insufficient, signaling that he had never been very serious about tying fentanyl to tariffs.

In response to Trump’s renewed tariff threat, President Sheinbaum cautioned, “It’s very important that the people know that we have made a very important effort of coordination, of collaboration, but it depends on the United States,” Sheinbaum said. “We have to respond to this decision.” An announcement of retaliatory measures by Mexico is expected later this week.

China responded to Trump’s hike in tariffs with a measured response, announcing a 15 percent new tariff on U.S. chicken, wheat, corn and cotton products and a 10 percent tariff on sorghum, soybeans, pork, beef, fruits, vegetables, dairy and fish products. “The Chinese people have never believed in coercion or intimidation, nor do we succumb to bullying and hegemonic tactics,” Chinese Foreign Ministry spokesperson Lin Jian said at a regular briefing in Beijing on Tuesday.

The last time China responded to Trump’s tariffs, farmers across the Midwest were hit badly enough that they needed a $28 billion bailout from the federal government. Trump appears to understand that there will be pain in the form of Chinese retaliation. He tweeted that U.S. farmers need to “start making a lot of agricultural product to be sold INSIDE of the United States” and further warned that there will be more tariffs on external farm products coming in a month.

He ended with, ”Have fun!” Because he just doesn’t care.

Tariffs are the new unwelcome disaster

The tariffs come at a particularly dicey time for the U.S. economy. They could easily deal a further blow to consumer confidence, which already saw a sharp decline last month. Moreover, a sharp uptick in inflation could cause the Federal Reserve to hold the line on cutting interest rates, meaning less money in the pockets of home borrowers and less investment and expansion by companies faced with higher borrowing costs.

Tariffs will add weight to an alarming projection by the Atlanta Federal Reserve that we are headed from what was 3 percent growth to a 2.8 percent contraction this quarter. There is already generalized uncertainty and anxiety over the Trump administration’s policies. These include hundreds of thousands of across-the-board federal job cuts, the loss of critical research funding from the NIH, a threatened gutting of Medicaid and food assistance programs, the possibility of payment disruptions from Social Security, and a looming possibility of a federal shutdown in just over a week should Congressional House Republicans fail to agree upon a continuing resolution to fund the government. That’s just to name a few.

The technical economic term for all of this is a “shit show.” And Trump’s tariffs only deepen the economic cliff we may soon hurtle into.