Donald Trump is threatening higher tariffs on all goods entering the US from Canada, Mexico and China.
They will be there until countries stop the flow of illegal immigrants and drugs into the US, Trump said. Mexico and China have threatened to respond in kind.
Businesses, economists and policy makers are trying to figure out how much of this is a threat, how much is a bluff and how much is real.
Trade wars are very easy to start. But it can be difficult to free yourself. And the consequences of this kind of global trade war can affect everyone.
“The result would be an immediate and severe recession on America’s northern doorstep that would eliminate demand for US imports,” wrote Derek Holt, vice president of Scotiabank Economics.
Tariffs would raise trade costs to Great Depression levels
Scotiabank used models that assessed how inflation could weaken demand and slow economic growth. Trump has threatened a 25 percent tariff on all goods entering the US from Mexico and Canada.
The US dollar, already appreciating against foreign currencies, will jump, forcing the Bank of Canada to raise interest rates, all while exporters are struggling. Canada’s GDP will decrease by 5.6 percent.
If Canada responded with its own taxes, the Scotiabank model found that interest rates would rise by 275 basis points (or 2.75 basis points). The loonie will fall by about 21 percent, the unemployment rate will rise by 3 percent and inflation will start again.
Karl Schamotta, chief global strategy officer at financial services firm Corpay, says Trump is threatening a level of trade barriers not seen in nearly 100 years.
“This will raise trade costs to levels last seen during the Great Depression,” Schamotta wrote in a note to clients.
Schamotta released a chart highlighting major changes in trade barriers going back to 1820. He measured the employment rate to see how tariffs affected the US economy.
The US Smoot-Hawley Tariff Act is a widely used example of how tariffs can make things worse, Schamotta said. In that case, tariffs were intended to protect American farmers and prevent the Great Depression of the 1930s.
At first they targeted wool and sugar, but they became overwhelmed as factories demanded more. Eventually, they were proposed in more than 800 different products.
Some countries impose their own tax. (Canada, for example, raised tariffs on US eggs by 233 percent.) Ultimately, this action only exacerbated the effects of the Great Depression.
Schamotta called it the worst economic disaster in American history.
He says it hurt American farmers, crushed auto and steel exports, slowed global trade and helped lower Wall Street stocks. And he says, the only people who benefited were the lobbyists.
It’s surprising that any leader would want to repeat the experience,” said Schamotta.
Meanwhile, Mexico said it would impose a 25 percent tariff on American companies, which Mexican President Claudia Sheinbaum said would lead to the loss of approximately 400,000 jobs in the United States.
“If there are US tariffs, Mexico will also raise prices,” Sheinbaum said.
The president of Mexico says that the United States-Mexico-Canada agreement has been good for all three countries involved and he said that his country is not interested in a trade war.
China’s answer?
In China, the government encourages cooperation. Trump has threatened an additional 10 percent tariff on Chinese goods entering the US, more than any other, until he stops fentanyl smuggling.
“No one will win a trade war or a tariff war,” Chinese Embassy spokesman Liu Pengyu said in a statement.
Experts say China seems to be waiting to see what Trump actually does. But China’s response will have a major impact on the global economy.
US President-elect Donald Trump vows to impose heavy tariffs on all goods entering the United States from Canada and Mexico. Andrew Chang breaks down why experts say the move will hurt Canada’s economy and examines how likely Trump is to follow through on his threat.
An expert in economics at the Council on Foreign Relations, Mr. Brad Setser, says that the important thing that we need to look at is whether China allows its currency to fall compared to the dollar.
If the yuan is less expensive, it will take fewer dollars to buy Chinese products. That can help offset the cost impact.
“China is faced with a choice between allowing the yuan to depreciate in the face of expected inflation (and the risk of a negative reaction from Trump leading to more inflation) or waiting for actual inflation before letting the yuan go,” Setser wrote. in the social media X.
Beijing did just that when Trump imposed tariffs on Chinese goods in 2018 and 2019.
At the time, the move created two problems. It has resulted in an increase in cheap Chinese goods flooding the world market. But the weak currency has also raised concerns about the impact it could have on China’s domestic economy.
Skip to 2024, and China’s economy has weakened significantly, as consumer spending has slowed and business investment in the country has slowed.
So going into Trump’s second presidency, China has less of a cushion than before.
“All this affects the whole world, since one of the main effects of the weak yuan is that it helps China to reduce the impact of any tariffs on its trade with the US by exporting higher to countries without tariffs,” Setser posted.
So the already global trade dispute between Canada, Mexico, the United States and China could quickly escalate into a series of tit-for-tat tariffs spread around the world.
The threat remains an illusion – for now
It is important to note that for now, the tax threat remains speculative. It was not announced as an official policy, but rather a post on social media late at night.
Oxford Economics ran the numbers on several scenarios. Economists when considering Trump’s proposal for 25 percent tariffs on Canada and Mexico and an additional 10 percent tariff on China have a 10 percent chance of actually happening.
The most likely – 25 percent – is strong in China but less aggressive in Canada and Mexico.
“Global tariffs are 30 percent on imports from China and 10 percent on all other imports from the rest of the world,” writes leading Oxford American economist Bernard Yaros.
Meanwhile, markets that would have been reeling from real costs and devastation from a trade war have been largely muted since Trump announced his tariff plan. Investors, for now, at least, are waiting for something tangible to react to.
Which might be good advice for everyone.
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