The Americas, explained.
The US auto industry is also dependent on sources of supply in Canada and Mexico (Artur Widak/NurPhoto via Getty Images)
The more successful the strategy the lower the tariff revenue generated, and other economic realities…
Subscribe to The Informer for monthly expert analysis, and to Events for advance notice of visiting world leaders and distinguished guests.
You may unsubscribe from Lowy Institute newsletters at any time. For information on our privacy practices and how to unsubscribe, see our Privacy Policy.
Trump tariffs – madness, method, or mayhem?Trump tariffs – madness, method, or mayhem?
Donald Trump has given Mexico and Canada a 30-day reprieve from the 25% tariffs levied on their exports (10% on oil) to the United States. The stated motivation for the US to violate the terms of the United States-Mexico-Canada Agreement was that Canada and Mexico needed to do more to quell the flows of fentanyl and undocumented migrants across their borders to the United States. Action by Canada, appointing a Fentanyl Czar, and Mexico, sending 10,000 troops to police the border has negotiated a delay.
But the threat of tariffs still stands over both these major US trading partners, with dire consequences for the US auto industry as well as for their cross-border suppliers. The threat of retaliation by both Canada and Mexico could have seen a full-scale trade war erupt, so a 30-day cooling period to sort out what are real US concerns is welcome.
The tariff action does not stop there, however. China has been hit with an additional 10% on top of already higher tariffs, and Trump has threatened that the European Union is next.
The purpose of this flurry of threats and actions is unclear. Is it a mistaken belief that the US can replace taxes with tariffs, or is it to promote US manufacturing jobs?
Tariffs are just taxes on imports, the direct costs of which will be shared between the US consumer and import using industries, and the exporter. How much the exporter pays depends on a host of factors including what other markets are available to the exporter. For Canada and Mexico’s auto part industries, the answer, at least in the near term, is few if any other markets. But the US auto industry is also dependent on these sources of supply. Sending your suppliers bankrupt is not a sustainable option, so it is a fantasy that the US will not pay at least a substantial portion of the tariff.
If tariffs are aimed at promoting growth in the production of domestic alternatives by increasing the prices of imports, the more successful the strategy the lower the tariff revenue generated. The US has a big diverse economy, so push up the price of imports enough and they will be replaced by domestic production. Whether this expansion in production delivers on the job promise will depend on the cost of labour relative to robots. The point is that success on jobs means less success on tariff revenue. It is madness to claim that tariffs can simultaneously raise revenue and deliver jobs in any significant quantity.
Donald Trump inspecting a section of the border fence between the United States and Mexico near the end of his first term, 2021 (Shealah Craighead/White House photo)
That brings us to whether there is method in the madness. The use of tariff threats as a bargaining tool can work well in a one-off game if the targeted country has a capacity to adjust its policies, and the policy changes achieve the desired outcomes. The best Canada can do is to over invest in reducing the very small quantities of fentanyl and migration across the borders. Success will hopefully not be too hard to declare.
Mexico has greater scope for action on drug and migrant flows, but wisely also negotiated for the US to reduce the flow of high-powered guns into Mexico. But stopping weapons, drugs and migrant flows is not just a matter of enforcement, as push and pull factors mean new ways will be found to restore the flows. Success will take time, and the threat of tariffs, at best, will keep political incentives to continue efforts to stop the flows alive.
It is hard to reconcile a US interested in keeping a rules-based approach to international markets with the tariff policies being wielded by the Trump administration
The problem with the ongoing threat of tariffs is that they reduce the confidence in investment in Mexico and with this its prospects for growth. And it is growth that provides the tax revenue to fund actions to control drug and migrant flows, and growth that reduces the incentives of Mexicans to cross the border in search of a better livelihood. So, it appears more madness in the method than method in the madness.
The US has played an essential role in promoting global growth as a source of innovation, foreign investment, and as a major market. Its support for international organisations that set standards and rules governing trade in goods and services, investment, and financial transactions expanded the wonder of the market mechanism in allocating capital and labour more efficiently and responding to consumer demand across borders.
The US benefited from this benevolence through the primacy of the US dollar in international trade and finance, and its “safe harbour” status, that meant even when it was the source of chaos (i.e. with the 2008 global financial crisis) it was able to attract capital and finance its ever growing fiscal and balance of payments deficits.
Trump’s tariffs are clearly in violation of the World Trade Organisation rules. But the US has been playing a spoiler role since the first Trump administration refused to approve the appointment of new judges to the WTO Appellant Body. It is hard to reconcile a US interested in keeping a rules-based approach to international markets with the tariff policies being wielded by the Trump administration. Talk of financial deregulation, forcing the Federal Reserve to hold reserves in crypto currency, and tokenising US Treasuries must at least shake confidence in the ongoing primacy of the US dollar.
So maybe mayhem is the intent, for purposes yet unknown.
About the author
Jenny Gordon
Dr Jenny Gordon is a Nonresident Fellow at the Lowy Institute and also a Honorary Professor at the Centre for Social Research and Methods at the Australian National University.
The most-pressing world events explained by Lowy Institute experts and global contributors, in your inbox, every Thursday.
You may unsubscribe from The Interpreter at any time. For information on our privacy practices and how to unsubscribe, see our Privacy Policy.
