The Trump Tariffs Are Here

Trump wants to act tough on trade and the border, but his plan could backfire badly

On Monday evening, President-elect Trump did what he often does: He announced big news via his Orwellian “Truth Social” platform. This time it was tariffs, specifically new 25 percent tariffs on goods from our northern and southern neighbors Canada and Mexico, and an additional 10 percent tariff on goods from China.

Canada, Mexico and China are our three largest trading partners. New tariffs at such high levels threaten to upend international trade, disrupt supply chains, and send prices soaring across North America. They would be an economic catastrophe, according to most economists.

Of course, in fairness this is precisely what Trump said he would do and what the voters elected him to do. Perhaps this is the inevitable beginning of “find out” time for the U.S. electorate, which hired Trump to lower prices but is likely in for some sticker shock.

Today’s piece is a bit of Tariffs 101, with a focus on how the proposed taxes would affect trade with our three largest trading partners. I’ll first cover what Trump announced and the reasons he gave for why, addressing his threats on our neighbors and also on China. We’ll pay some close attention to Trump’s specific language because that could shape the course of events to come. 

Second, I’ll address the question, “Can Trump really do that?” The short answer is “yes” but there is a longer discussion to be had around whether the tariffs would be reversed, particularly because they would violate the plain terms of the United States-Mexico-Canada Agreement (USMCA) that Trump himself negotiated and signed.

Third, I’ll discuss the broad impact such high tariffs would have upon our economy and which sectors might feel the immediate effect. Sadly, consumers wary of higher prices aren’t going to like the answers.

Lastly, I’ll peer inside the muddled mind of the president-elect and posit a few theories about what he’s up to and where this is headed, using past behavior and outcomes as a guide. I’ll show how Trump’s attempt to bludgeon his way into getting what he wants won’t necessarily work this time and will carry longer term consequences that will be difficult to shake.

Trump’s tariff threats against our neighbors

In his social media post Monday evening, Trump declared that on the first day of his presidency, as one of his first actions, he would “charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders.”

He claimed the tariff would remain in effect “until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!”

Unpacking this statement a bit, as we have to do with all of Trump’s posts, it’s important to clarify that the parties who will be “charged” the 25 percent tariff are not Mexico and Canada as he claims. Rather, they are U.S. companies, which would have to pay the import tax to the U.S. government and would likely then pass that additional cost on to consumers. 

Even in this announcement, note that Trump continues to spread disinformation about who actually pays those tariffs. This is an important clue as to how Trump and his allies may try to spin who is at fault for the inevitable economic fallout from his tariffs. 

For example, it is likely that these nations will retaliate by raising import taxes on U.S. goods—with devastating consequences for U.S. exporters, just as we saw during Trump’s first term. Mexico’s president has already signaled her intent to do so. That would result in a classic trade war, in this case one started by the U.S. 

Yet by fooling the public into thinking Trump has taxed our trading partners rather than his own people, he could set up a boogeyman. He could then falsely claim other nations “attacked” us economically and are the ones truly responsible for losses by U.S. exporters and higher prices at home. These exporters include farmers across the midwest, many of whom wound up receiving massive government subsidies during the last trade war just to cover their losses.

It’s also important to point out that border crossings are currently at a multi-year low and there simply is no “Open Border” as Trump claims. That is a misleading Republican talking point. 

Further, most fentanyl is smuggled into the country not across the border but by U.S. residents coming through legal ports of entry. But Trump is setting up an expectations game here. If, under the threat of punishing tariffs, an agreement is reached in which our neighbors make new pledges to address the “border” and the fentanyl crisis, Trump can claim a political win, even if nothing fundamentally changes.

Trump’s use of the word “invasion” is also noteworthy. As I’ll discuss below, in order to get around the USMCA, Trump may be forced to declare some kind of “emergency” that permits him to raise tariffs despite the language of that agreement. He might further seek to justify his invocation of emergency powers or even the mass deportation of undocumented migrants under the Alien Enemies Act by declaring our nation is being “invaded” and we are essentially on a war footing. That again would be contrary to all evidence, but Trump has never been constrained by reality or facts.

Trump’s tariff threats against China

Shortly after threatening Canada and Mexico with crippling tariffs, in a separate post Trump said he would be adding a new 10 percent tariff on all Chinese-made goods. His rationale? He claimed that China had promised to crack down on fentanyl drug dealers by imposing the “maximum penalty, that of death,” but that “drugs are still pouring into our Country, mostly through Mexico, at levels never seen before.”

This is also a false or at best misleading statement. The Biden Administration has been effective at interdicting fentanyl coming into the U.S., and fentanyl-related deaths have dropped precipitously. Just this past week, the New York Times reported that drug fatalities have been declining for seven straight months thanks to the hard work of federal drug enforcement:

The fentanyl on the street is starting to become weaker. Anne Milgram, who heads the Drug Enforcement Administration, announced last week that for the first time since 2021, the agency was seeing a decline in fentanyl potency, a development she attributed to the government’s crackdown on Mexican cartels and international supply chains. 

In response to the tariff threat, a Chinese embassy spokesperson, Liu Pengyu, suggested that the rationale for the tariffs was pretextual, and really who can blame him? Liu noted that China had taken steps to combat drug trafficking after an agreement was reached last year between President Biden and Chinese President Xi Jinping.

"The Chinese side has notified the US side of the progress made in US-related law enforcement operations against narcotics," Liu said. "All these prove that the idea of China knowingly allowing fentanyl precursors to flow into the US runs completely counter to facts and reality." 

It is admittedly surreal to be lectured by CCP propagandists on what is fact and reality when it comes to drug policy, and still to come down on their side instead of the incoming president’s. Yet here we are.

Are the tariffs even legal?

The tariff announcement is new enough that legal experts have yet to fully weigh in on whether they would ultimately pass muster. But we can make some general assessments.

The backdrop to these new tariffs is the USMCA, which took effect in 2020 and established a highly favorable trading zone among the three signatory countries. Under that agreement, goods traded among the three parties across borders on a completely duty-free basis.

Trump previously boasted about how the USMCA was a huge improvement over the prior pact and that he was proud of what he’d delivered. “The USMCA is the fairest, most balanced, and beneficial trade agreement we have ever signed into law. It’s the best agreement we’ve ever made,” Trump said in January 2020.

But does Trump have economic amnesia? The new tariffs he announced on Monday cannot be reconciled in any way with the USMCA. John Veroneau, a former trade negotiator under President George W. Bush, concurred in response to questions from the Washington Post.

“Obviously, unilaterally imposing a 25 percent tariff on all trade blows up the agreement,” said Veroneau, who added that each country affected by the planned tariffs is likely to retaliate by placing import taxes on U.S. goods. That would hurt U.S. exporters, Veroneau said.

Trump may be seeking to exploit an exception to the USMCA by arguing that the tariffs are “exceptional and justified” due to the circumstances he described, namely an “invasion” by migrants and the movement of drugs across “open borders.” 

But as Luis Rubio, a member of the team that negotiated NAFTA on behalf of the Mexican government, noted back in July when Trump was threatening a 10 percent across the board tariff hike,

“Most goods traded between Mexico, United States and Canada, which originate in any of those counties have a preferential tariff treatment of 0% import duty,” he says. “The USMCA provides that any of the parties can increase tariffs on products originated from any of the other parties only on exceptional and justified basis.  A 10% increase on all tariffs, seems far from being exceptional and justifiable, and therefore, will likely be construed as a trade barrier in violation of the USMCA.”

While Trump might present a colorable claim that the tariffs are somehow “justified” by international circumstances, it would be far harder for the administration to argue that a blanket tariff is somehow “exceptional” under the agreement. Exceptional means deserving of special consideration, other countries likely will argue, the very opposite of an across-the-board hike.

The agreement has specific provisions for state-to-state disputes that government lawyers for Canada and Mexico are likely furiously reviewing today. It may well be that Trump lacks legal authority to impose these tariffs in light of the USMCA, and courts may roll them back. But that would take some time, and the chaos that would ensue in the interim is damaging enough. Further, there isn’t any argument under the USMCA that Trump can’t unilaterally impose tariffs on Chinese goods, so those already likely can’t be blocked at all.

The broad and terrible effects of the tariffs

There isn’t any way to sugarcoat this. The threatened tariffs, particularly on Canadian and Mexican goods, would be devastating, both to those countries and to U.S. consumers. The retaliatory measures would then hit U.S. exporters hard. This move is also likely just the beginning of what we might ultimately see. As Reuters put it,

Economists say Trump's overall tariff plans, likely his most consequential economic policy, would push U.S. import duties back up to 1930s levels, stoke inflation, collapse U.S.-China trade, draw retaliation and drastically reorder supply chains.

Some $1.5 trillion worth of goods move among the three North American nations annually, while the U.S. and China exchange about $600 billion worth each year. CNN laid out some of the sectors that would be hardest hit by the tariffs:

The United States’ top import from Canada is oil, which reached a record 4.3 million barrels per day in July, according to the U.S. Energy Information Administration. America also imports cars, machinery and other various commodities, plastics and wood from Canada, according to the United Nations’ Comtrade.

America gets the majority of its cars and car parts from Mexico, which surpassed China as the top exporter to the US in 2023, according to trade data released by the Commerce Department earlier this year. Mexico is also a major supplier of electronics, machinery, oil and optical apparatus, and a significant amount of furniture and alcohol comes from the country into the United States.

The United States imports a significant amount of electronics from China, in addition to machinery, toys, games, sports equipment, furniture and plastics.

As the Washington Post observed,

Tariffs on Mexican and Canadian products would be especially disruptive for the auto industry. Half-finished vehicles often move across North American borders several times before they are completed. Adding a 25 percent fee to each movement could erode automakers’ profits or give consumers sticker shock.

On top of that, grocery prices—many voters’ top concern in the past election—would be deeply affected. As the Post noted, Mexico supplied more than half of U.S. fresh fruit imports in 2022. 

U.S. motorists also would see a near immediate hike in prices at the pump, especially in the midwestern states. As economist Joey Politano explained, Canadian pipeline-transported crude oil supplies key refineries throughout the U.S.

And that’s just the oil, food and manufactured goods coming in. If these nations retaliate by raising tariffs on U.S. exports, such items become far more expensive and non-competitive. 

Will Trump really go through with it?

There are various takes on how “serious” Trump is here. On the one hand, Trump did announce tariffs, even on our trading allies, during his first term, but those wound up being more like negotiating ploys. Ultimately, the parties reached an agreement—the USMCA—governing the free trade of goods among the signatories.

William Reinsch, a former president of the National Foreign Trade Council, takes the view that this is an attempt to preemptively renegotiate the USMCA. “This strikes me more as a threat than anything else,” Reinsch said. “I guess the idea is if you keep hitting them in the face, eventually they'll surrender.”

In Mexico, political leaders warned against such tariff threats. Lower house leader Ricardo Monreal, a member of the ruling Morena party, urged “the use of bilateral, institutional mechanisms to combat human, drug and arms trafficking.” He warned against blunt force, posting on Twitter, “Escalating trade retaliation would only hurt the people's pocketbooks and is far from solving underlying problems.”

Mexico has some reason to doubt that Trump would follow through with such a draconian tariff hike. In May 2019, Trump warned he would raise tariffs by five percent a month, seeking to pressure Mexico into stopping Central American migrants from crossing its territory. After much criticism, even from his own party, a little over a week later Trump backed off, claiming a win by saying Mexico had agreed to take “strong measures” to halt migrants.

But there are only so many times ploys like this will work, especially because Trump has cried tariff wolf before and these countries know what’s coming.

"This is more likely a play designed to put pressure on our closest trading partners," said Raymond Robertson, a professor of trade, economics and public policy at Texas A&M University to ABC News. “But this is the same playbook done the second time around. If you're on the football field and you call the same play twice, it's not going to be as effective the second time.”

Robertson added that other countries know these tariffs would be “disruptive” and a “disaster,” but they’ve “seen how this game works.” Perhaps more ominously, our trading partners could decide to seek closer ties to Europe and other countries and rely less on the U.S., “which means higher prices for us,” added Robertson.

Further, what is the value of even entering into a trade agreement with the United States if the incoming, chaos-agent-of-a-president is going to ignore it anyway and hold major world economies hostage? The credibility and reliability of the U.S. is now shot full of holes, not only on the security front but also in our economic ties and long standing commitments to free trade. 

Moreover, Trump’s threats make it nearly impossible for supplies, manufacturers, and importers/exporters to plan for the future, which will in turn slow economic investment and raise risks for everyone. Companies must now assume the worst and plan for it, which could result in immediate price hikes as manufacturers buy up supplies before the tariffs hit.

In short, if this is some kind of a negotiating ploy, it could backfire badly on Trump. It could confirm to even our closest trading partners that they should source their supplies from countries other than the U.S. and develop customers in markets governed by more stable and predictable economic policy. 

The big loser in all of this is the U.S. economy, which will lose out on market opportunities and growth. And U.S. consumers will inevitably face higher prices across the board.

It may not be what they voted for. But it’s what’s coming.