Trump’s tariff gambit doesn’t have to make sense

Blunt force. Economists had expected Donald Trump’s new tariffs would be reined in by common sense, they were wrong. On Monday evening, the U.S. president-elect pledged across-the-board tariffs of 25% on Mexico and Canada, blaming America’s neighbours for failing to halt flows of illicit drugs and undocumented immigrants across their borders. He also promised a fresh 10% tariff on China, a developer of the chemical ingredients of fentanyl, until flows of the opioid are halted.
As a naked exercise of power, the move is canny; Trump is delivering on a campaign promise to tackle drug and people flows by making the problems an immediate corporate concern for global companies. Many of those were counting on protection from the United States-Mexico-Canada Agreement which Trump signed in 2020, a trade deal his new pronouncement seems to violate. About a quarter of European carmaker Stellantis' North American sales are made in Mexico, while Asian peers Honda and Toyota will also be hit. South Korea's Samsung has also boosted investment in the country in recent years.

The levies are more than double the 10% hit many economists expected Trump to impose on most countries once he enters office on Jan. 20. His move makes clear that America’s approach to bilateral relations is edging closer to the openly transactional approach of China, which rarely hesitates from leveraging its trading relationships to extract concessions from countries it views as misbehaving.

The initial 10% hike on China, then, gives the People's Republic a taste of its own medicine. It may also put extra pressure on companies like Temu owner PDD Holdings, which has relied on de minimis shipments through Mexico to access the American market.

Optimists will point to the hike on Chinese goods as a sign that the worst-case scenario of 60% blanket levies may not come to pass. Goldman Sachs on Nov. 15 forecast an increase of 20 percentage points as its base case, so the new hike, if it materialises, would ostensibly take China halfway there.

But Trump’s language suggests this move is unrelated to his longtime complaint about the country’s trade surplus with America, nor its failure to buy an additional $200 billion in American goods as promised in a trade truce both sides signed in 2021.

There is an element of hypocrisy to that logic but this was not unusual during the last Trump administration. It’s only common sense to expect more of the same this time round.

Context News

Donald Trump on Nov. 25 pledged to impose additional 10% tariffs on Chinese products and 25% tariffs on imports from Mexico and Canada over what the U.S. president-elect described as those countries’ failure to deal with flows of fentanyl and undocumented migrants to the United States.

Trump, who takes office on Jan. 20, said in posts on Truth Social that the levies on China were in response to the country’s failure to impose the death penalty on drug traffickers dealing in fentanyl. He said the levies on Mexico and Canada would remain in place until flows of immigrants and drugs to the United States were ended. The comments are among his most specific since winning the Nov. 5 election on promises to "put America first".