How Trump's Tariffs on Canada, Mexico, and China Will Wallop the U.S. Economy

By Arun Dahal Khatri

President Donald Trump made a dramatic turn in U.S. trade policy by slapping wide-ranging tariffs recently on Canada, Mexico, and China, ratcheting up economic tensions with America's largest trading partners. This is the reason they had been due to raise tariffs by 25% on most of the Canadian and Mexican goods, by 10% on energy products in Canada, and 10% on Chinese goods to jolt the global supply chains and consumer prices besides posing risks in the home-based and global economy. The Administration supports these measures as a means to strengthen U.S. industries and help reduce the trade deficit. In economic reality, however, it may spill over into inflation, consumer purchasing power, and diplomatic relationships with key allies and rivals.

The imposition of tariffs will likely raise prices immediately for American consumers. The first two exporters to the U.S. are Canada and Mexico, and China ranks third. In nature, the tariffs are an indirect tax on consumers since the imposition of such duties would, by implication, translate to the passing on of the rise in costs to buyers. Just recovering from the worst effects of inflation, American households prepare for a fresh onslaught of inflation on sundry consumer goods like automobiles, electronic gadgets, and agricultural produce of fruits, peanut butter, and bourbon. All that would shrink their real spending power and cut discretionary spending to make way for increased spending on basic needs, probably slowing the economy. The Seriousness of Consequences of Inflation The tariffs on all imports are a form of supply-side shock; manufacturing goods are costlier for those manufacturers who rely on spare parts and components from foreign countries. With higher input costs, companies will either cut production or merely pass on higher costs to consumers, adding to inflationary pressures. The Federal Reserve has spent the last two-plus years fighting inflation, and these tariffs would undo some of that work. Higher inflation likely would keep the Fed on its path of higher interest rates for longer, depressing investment and slowing job creation.

Though bunched together as tariff targets, Canada, Mexico, and China have responded differently. Canada declared a two-step retaliation, slapping a 25 percent tariff on U.S. exports valued at C$155 billion ($106 billion) and aimed at politically influential states such as citrus from Florida and bourbon from Kentucky. However, Trudeau held off slapping tariffs on critical manufactured products - including automobiles - in a calculated act of restraint to avoid inflicting self-harm. So far, Mexico- whose president is Claudia Sheinbaum-has hit back with hot rhetoric: denying Mr Trump's accusations of drug trafficking and pledging an investigation into retaliatory measures against products linked to states that tend to vote Republican. Mexico has tried this approach in earlier trade tiffs, with some success. But Mexico exports a whoppin' 40% of its GDP in goods, and 80% of those exports go to the U.S. It probably would knock off 2-4% of the Mexican economy, assuming that a 25% the economic pain will be big south of the border.

China has reacted much more cautiously, publicly denouncing the tariffs but holding its fire without immediate retaliation. Instead, it threatened to file a complaint with the World Trade Organization, which is little more than a symbolic act. Still, potent economic weapons remain in its arsenal: devaluation, export restrictions on rare earth materials, and further trade barriers for American companies operating within its vast market. The initial Chinese reaction was measured, but escalation could not be excluded.

All this notwithstanding, the Trump administration remained convinced that these kinds of tariffs would, over time, pay off and, therefore, reduce dependency on foreign goods; to that effect, the country is said to be motivated to correct trade imbalances by boosting local manufacturing. Such higher import costs, in turn, would tempt companies back into relocating their production to the U.S., causing more employment to be created- firstly in the steel and aluminum industry and further into the auto-manufacturing business. This is a practical action besides boosting America's industrial competitiveness over time. The other ways tariffs help are by inducing foreign firms to negotiate more advantageous trade terms on behalf of the United States, much of what Trump's entire approach to trade has depended upon, hardball to wrench concessions. "By ratcheting up economic pressure on both Canada and Mexico, as well as on China, the Administration is trying in its own particular way to push those countries toward cutting their trade barriers and allowing more American products into their economies.

Besides all these presumed benefits, the unappetizing fact is that American consumers stand out as the first to bear this tariff war. Increased costs for staple goods reduce household budgets while painfully hitting especially low—and middle-income families who spend most of their income on household items. These inflationary pressures and the threat of job losses in export-oriented sectors will undermine economic confidence and further restrain consumer spending as a source of U.S. economic growth. Another sure impact is more volatility in financial markets. Investors are concerned that unrelenting trade friction could lead to a worldwide trade halt, make companies even more unpredictable, and slow economic growth. Stocks have been responding to their concerns about inflation, reduced corporate earnings, and tariff-sensitive sectors of the economy such as manufacturing and retail.

These developments will also not leave the world economy in its cocoon. The European Union is already keen on these developments, doubting that the same measures could be instituted against its member states. Thirdly, retaliation by Canada and Mexico may make the dispute more protracted and deteriorate the situation rather than improve it. Through these trade negotiation processes, Mexico has played a balancer's role and usually falls into the predicament while balancing the United States with economic interests. For instance, countries such as Canada and Mexico, jointly with China, would immediately wish that there be an internal political and economic backlash in the United States for a downward trend to be elaborated. Of course, American farmers and manufacturers oppose it as much as major retailers will now be, particularly in all states with heavy Republican majorities. Indeed, if there are escalating protests against surging prices among a wider section, the Administration must revisit this anti-trade policy again.

The aggressively deployed tariffs under Trump unmistakably marked an inflection point in U.S. trade policy away from decades of promoting free markets toward protectionism. Rejuvenating American industries and trimming trade deficits are longer-term positive effects that the Administration has now discussed. In contrast, the major short-term ones include higher prices, inflationary pressures, and strained diplomatic relations with various key economic partners. Retaliation from Canada, Mexico, and China has also been restrained to date-similar countermeasures, but a more prolonged conflict would almost certainly cause severe devastation to the economies of all parties involved. Whether the outcome will be judged a success for this policy is an outcome that was intended to benefit the American worker and industry but without destabilization in the overall economy. The world holds its breath, for this chess game in economics pans out into high stakes in world trade and monetary stability.