Donald Trump has imposed 25% tariffs on products from Mexico and Canada and 10% on Chinese products. This is a first step.
There are several points to emphasize.
1- During the election campaign, China was America’s number one enemy. Why then apply lower tariffs to it than Canada and Mexico. And even taking into account the tariffs put in place during Trump’s first term, the rate is just a little higher than that of the other two countries.
Yet Canada’s dependence on trade with the US is much greater than that of China. 77% of Canadian exports go to the US, while the figure is only 16% for China. Would the impact of excessively high tariffs with China be excessive?
2- These measures have already provoked retaliation. China has taken the matter to the WTO and Justin Trudeau has announced tariffs on American products. Denmark’s reaction to the Greenland issue sheds light on the consequences of the retaliation. The price of Ozempic, widely used by Americans to lose weight, would see its price increase by 500%. Who would lose? The American who wants to lose weight and who will no longer have access to it.
3- NAFTA, the American free trade agreement, was built to make North America an efficient manufacturing platform. Manufacturing centers are spread throughout the territory.
The implementation of tariffs calls into question this construction that is beneficial for all. The instability of political relations is unfavorable. Throughout the production process, products cross borders multiple times. Will the goods that cross the border have to pay a tariff each time? The dynamics of production will not withstand it. It can even be an excellent way to create disruptions in the production process. We are thinking here of the automobile. Some imagine a blockage of the automobile market very quickly and a $3,000 increase in the price of vehicles.
4- The impact of the measures on the U.S. economy would be 0.8% on American inflation, or an additional cost of $1,250 per household. For the entire American economy, the shock would be -0.2% in the medium term: no rebound effect expected in the future.
Donald Trump’s mercantile approach can be summed up by this statement from Sir Thomas Smith in 1549: “We must always take care not to buy from foreigners more than we sell to them, for we risk thereby impoverishing ourselves and enriching them.” This vision of the world was contradicted by Ricardo who showed the collective interest of exchange.
Implementing customs tariffs is to hinder trade and penalize the counterparts of a country but also of its consumers and its companies. It is simply the promotion of a balance of power imposed on a shaky economic model.