Trump wastes no time in reigniting trade wars
Donald Trump has fired the first shot. Goods arriving in America from Canada and Mexico will meet tariffs of 25% as soon as he returns to the White House, the president-elect wrote on November 25th. Mr Trump also said that he would impose additional 10% tariffs on Chinese goods. He is not wasting any time in seeking to exert America’s influence.
Since Mr Trump’s victory in the presidential election, investors had speculated (and hoped) that campaign tariff talk might be employed merely as leverage to win concessions on other issues. Scott Bessent, a former hedge-fund manager who Mr Trump has nominated to be treasury secretary, had suggested that Mr Trump’s levies could be an opening gambit.
The president-elect’s actions indicate a more chaotic approach. In posts on his social-media app, Mr Trump said that tariffs would stay in place until the flow of drugs and immigrants into America had halted. After the announcement, the Mexican peso fell by 2%, reaching almost 21 to the dollar. At 1.41 to the greenback, the Canadian dollar traded at its lowest since 2020.
But markets then see-sawed again late on November 27th, when Mr Trump said that he had spoken to Claudia Sheinbaum, Mexico’s president, and that she had agreed to halt the flow of migrants heading to America’s southern border. Mr Trump did not mention the tariffs he had promised. The peso duly erased much of its losses from earlier in the week.
As this piece was published, Mr Trump’s plans remained somewhat mysterious. If he does want to introduce tariffs on his first day in the White House, little will stand in his way. Doing so by executive order might break the terms of the US, Mexico and Canada Free Trade Agreement (USMCA), which replaced the North American Free Trade Agreement during Mr Trump’s first administration. Yet governments in Ottawa and Mexico City will struggle to prevent the incoming administration from violating the agreement, which is due to be reviewed in July 2026. Mr Trump faces few other legal obstacles.
Whether Mr Trump actually will implement tariffs is a more difficult question. It is not just his apparent change of heart after his conversation with Ms Sheinbaum. In 2019 he announced his intention to raise tariffs on Mexico to 25%, but dropped the plan a week later, when the Mexican government agreed to send troops to turn back migrants from Guatemala who were heading for the American border.
Such is the fickleness with which businesses relying on cross-border trade must now contend. They are not taking any chances. Many are already building stockpiles of the sort of imported goods that might soon face steep tariffs. America’s National Retail Federation, an industry group, expects import volumes to rise by 14% year-on-year in November, compared with a 1% increase it forecast before the election. Mr Trump’s latest announcement is likely to accelerate this stockpiling.
A sudden increase in the cost of imported products would raise prices for American consumers. Corie Barry, chief executive of Best Buy, an American retailer, said on November 26th that the cost of incoming tariffs would be shared between companies, vendors and consumers. “These are goods that people need and higher prices are not helpful,” she added. Analysts at Barclays, a bank, suggest that the proposed tariffs would raise American consumer prices by 0.4 percentage points.
Particular industries and regions would suffer more pain. Despite its own oil-and-gas boom, America still imports 4m barrels of crude a day from Canada, for instance—much of which goes to the Midwest. More than half of America’s imports of fruits and vegetables come from Mexico. Carmakers, which have built factories in Mexico to produce vehicles for the American market, are especially vulnerable. America’s Ford and General Motors are among those that would be affected, as are Japan’s Nissan and Toyota, and Germany’s BMW and Volkswagen. The stock prices of several of the more exposed importers slumped on September 26th. General Motors’s fell by 9%; Ford’s by almost 3%. Big importers of materials from affected countries, including Lululemon, which sells clothes, and Constellation Brands, which imports Mexican beers such as Corona, Modelo and Pacífico, fell by 2-4%.
Trump’s piñata
Although threats to the commercial relationship between America and China have attracted more attention, the economic damage to America’s neighbours has the potential to be far greater. Last year only 15% of China’s goods exports went to America directly, compared with 78% of Canada’s and 80% of Mexico’s. Most of their trade travels by land, and will be difficult to redirect to alternative markets.
As the arrival point for many immigrants entering America illegally, its southern neighbour has faced particular ire from Mr Trump. “The number of friction points with Mexico is just enormous,” said Adam Posen of the Peterson Institute for International Economics, speaking before Mr Trump’s announcement. “Mexico is going to be both the most harmed, and the most likely to be used as the demonstration case.” After Mr Trump’s opening salvo, Ms Sheinbaum suggested that she would fight back. “One tariff will follow another in response,” she explained. Then her account of the subsequent call differed to Mr Trump’s: Mexico’s president said that she simply explained the migration measures her government already has in place.
Some Canadian politicians had hoped to strike a deal with Mr Trump. Doug Ford, premier of Ontario and chair of the Council of the Federation, which represents the country’s provinces, had sought a separate bilateral agreement with America, cutting Mexico loose. Justin Trudeau, Canada’s prime minister, has sought to emphasise the country’s common cause with America in criticism of China’s trade practices. For both of America’s neighbours, the question now is what exactly it will take to placate Mr Trump. Will kind words be enough?
Chinese officials may, on the other hand, be a little relieved. Although Canada and Mexico would be hit hard by the tariffs Mr Trump proposed on November 25th, the levy on Chinese goods is lower than the 60% he had earlier suggested. Nomura, a bank, nevertheless expects that extra tariffs of 10% would produce a 2% fall in the Chinese yuan, reducing it to around 7.4 to the dollar, its lowest in 17 years. And there is always the potential for escalation.
Reading Mr Trump’s mind when it comes to tariffs is impossible. But efforts in foreign and finance ministries to avoid their full brunt, or to respond in kind, will now be redoubled. If his threats come to pass, the impact on global commerce will be immediate and extensive—and American consumers will pay the price. ■
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