Despite President-elect Donald Trump repeatedly touting that “tariff” is his favourite word, many observers, investors, and foreign government officials had hoped his promises were mere rhetoric. They doubted he would truly pursue the tariff-centred protectionist agenda he campaigned on. However, his recent appearance on Meet The Press, in which he reiterated that he is “a big believer in tariffs” and that they “cost Americans nothing,” reinforced his earlier threats to impose 25% tariffs on all goods from Mexico and Canada, and 10% on China. These tariff threats are no longer seen as mere bluster.
Trump’s broader trade strategy reflects a worldview rooted in 19th-century mercantilism, which champions protectionism and the aggressive use of tariffs. Trump sees tariffs as multipurpose tools—either as negotiating leverage to secure better deals or as ends in themselves. He believes that tariffs can stimulate the reshoring of American manufacturing and generate revenue to fund tax cuts and spending. While Trump argues that tariffs are “costless,” dismissing any negative impact on domestic consumers or businesses, his approach is a significant risk for both the United States and its trading partners.
Impact on China
For China, Trump’s proposed 10% tariff—a less aggressive figure than the previously threatened 60%—is still a significant issue. China’s initial response will likely be to devalue its currency, the renminbi (RMB), which effectively offsets the tariff by lowering the dollar price of Chinese exports. This tactic was successful during Trump’s first term and could be replicated again. China has the ability to further weaken the RMB to maintain its export competitiveness without directly escalating tensions with the US.
China may respond to further tariff threats by adopting a more assertive strategy, especially under the leadership of President Xi Jinping. Xi is now more politically secure than he was during Trump’s first term, allowing him greater flexibility in navigating external pressures. Should Trump escalate tariffs, Xi could decide to tackle US concerns more seriously, perhaps engaging in broader trade negotiations, or he could push back against Trump’s tactics more aggressively. This could involve China using countermeasures like export restrictions or imposing export controls on essential minerals, targeting specific US industries, and inflicting economic pain without triggering a full-scale trade war.
Impact on Mexico and Canada
For Mexico and Canada, the hope remains that Trump’s tariff threats are mere negotiation tactics, with the expectation of concessions being made before he officially takes office. However, the potential fallout is significant. The auto industry, which spans all three countries and is subject to the US-Mexico-Canada Agreement (USMCA), would face dire consequences from a 25% tariff on all goods crossing the border. Each vehicle produced under USMCA typically crosses the border multiple times during production, meaning tariffs would compound at each stage. This would result in higher costs, disrupted supply chains, job losses, and increased prices for consumers.
For Mexico, tariffs could further strain its relationship with President Claudia Sheinbaum’s administration. While Sheinbaum can promise measures to curb drug trafficking and immigration flows, her government faces significant limitations in addressing these issues, particularly given the entrenched presence of violent cartels. This creates a potential risk of escalating tensions, especially if Trump imposes tariffs as punitive measures.
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Canada, whose trade surplus with the US largely depends on crude oil exports, could face significant challenges. American refineries are specifically set up to process Canadian crude, and these refineries have limited alternatives for sourcing oil. A tariff on Canadian oil would create a bilateral monopoly that harms both sides, leading to economic consequences for both countries.
What’s Next?
While Trump’s protectionist policies may yield some immediate concessions, they also risk long-term consequences, including alienating key allies and exacerbating the fragmentation of global trade networks. The broader effect could erode US influence in the global economy and sow discord with its trading partners. Meanwhile, China is positioning itself as a global trade leader, working to strengthen ties with countries in the Global South, as well as US allies like Europe and Japan. Trump’s aggressive trade stance could further push China away from US influence.
The impact of Trump’s tariffs will ultimately depend on how the stock market and the broader economy respond. A significant downturn in equity markets or a sharp spike in inflation could force Trump to reconsider his approach. For now, the stakes are high, both for the US and for its trade partners. Whether these threats lead to a genuine shift toward economic isolationism or are just a calculated bluff remains to be seen, but the global economic landscape is at risk of significant change.
