Was that the shortest trade war ever, or an omen of what’s to come? And did America’s neighbours, Canada and Mexico, roll U.S. President Donald Trump when they essentially agreed to do what they had already been doing in return for the president suspending his threat of 25 per cent tariffs on goods imported from their countries?
Whatever the truth of what we just witnessed, we’ve at least temporarily averted an expensive economic crisis that could have crippled the economies of all three countries.
Just days after announcing harsh tariffs on Canada, Mexico and China for the stated purpose of “halting illegal immigration and stopping poisonous fentanyl and other drugs from flowing into our country,” President Trump paused the levies for one month.
“Canada will implement their $1.3 Billion Border plan,” Trump wrote on Truth Social, boasting of the concessions he’d extracted from America’s northern neighbour. “Nearly 10,000 frontline personnel are, and will be, working on protecting the Border. In addition, Canada is making new commitments to appoint a Fentanyl Czar.”
Sure enough, the Canadian government announced the $1.3-billion plan, along with “new and expanded detection capacity to better detect illegal drugs and other threats” and efforts to “improve the rate of removals of inadmissible people.” But the announcement was dated Dec. 18, 2024. The Feb. 4 agreement largely promised to do what was already planned, in new verbiage.
Trump’s similar announcement about Mexico seems to have that country’s government agreeing to do what Mexico’s previous president negotiated with the U.S. in 2019, during Trump’s first term. “Trump got rolled by both of these countries,” economics columnist Catherine Rampell commented on CNN.
Whether or not that’s true, thank the deity of your choice for the pause. Tariffs are dangerous taxes that raise prices for consumers and hobble economies.
Looking specifically at the Trump administration’s proposals for 25 per cent tariffs on goods from Canada and Mexico and 10 per cent tariffs on China, a report from the nonpartisan Tax Foundation estimates they “would shrink economic output by 0.4 per cent and increase taxes by $1.1 trillion between 2025 and 2034 on a conventional basis, amounting to an average tax increase of more than $800 per U.S. household in 2025.”
Retaliatory tariffs, the report points out, would further raise costs and slow economic activity to the detriment of all the countries involved.
Writing in the Wall Street Journal, economists Phil Gramm, former chairman of the Senate banking committee, and Larry Summers, president emeritus of Harvard University, also warn of the damage done by tariffs and the trade wars they cause.
“Labour and capital are in turn diverted from producing goods and services that couldn’t be acquired more cheaply internationally,” they write. “In the process, productivity, wages and economic growth fall while prices rise. Tariffs and the retaliation they bring also poison our economic and security alliances.”
Concern for economic and security alliances must play a role given that Canada and Mexico border the U.S. and, with China, are is its top trading partners. Imposing tariffs that inevitably invite retaliation can only harm good relations, while making all the parties involved poorer.
Unfortunately, in its turn away from the free-market ideas that have empowered people around the world to drag themselves out of poverty, the GOP has embraced a weird variety of zero-sum statist economic ideas that pretend governments can and should guide economic activity in a battle to the finish with other nations.
In fact, the new Republicans aren’t that different in their beliefs from their rivals in the Democratic party, leaving the two groups viciously battling over branding and emphasis more than core economic philosophy.
As a result, we see Republican Sen. Josh Hawley of Missouri teaming up with Vermont socialist Sen. Bernie Sanders, who sits with the Democrats, on a bill to cap credit card interest. It’s a scheme intended to save people from “out of control” costs that’s likely to leave higher-risk borrowers unable to get traditional loans and subject to the tender mercies of payday lenders and their black-market cousins, loan sharks.
On a similar note, Stephen Miran, Trump’s nominee to head the Council of Economic Advisers, insists against all historical evidence that, “Tariffs are ultimately financed by the tariffed nation, whose real purchasing power and wealth decline.”
He acknowledges the dangers of retaliatory tariffs but insists the U.S. “can withstand tit-for-tat escalation more easily than other nations and is likelier to win a game of chicken.” Which is to say, he thinks Americans should risk a trade war in the belief that we’ll impoverish everybody else before they get a chance to send us to the poor house.
Inconveniently for Miran, two of the economists he cites to reach his conclusion, Andres Rodriguez-Clare and Arnaud Costinot, repudiate his interpretation of their work. They say harm from retaliatory tariffs is much less avoidable than Miran and his colleagues claim — in fact, it’s virtually inevitable.
“Pursuing a policy of raising tariffs would most likely lead to a new global trade war,” Rodriguez-Clare and Costinot cautioned last month. “It would mean less trade and, most importantly, less international co-operation on the big issues of the day: war, poverty and climate change.”
A global trade war would also lead to higher prices for consumers, reduced economic activity as costs rise across the board and poorer people in every country affected by the imposition of tariffs and retaliatory counter-tariffs.
Almost incidentally, tightened border controls would also raise the potential profits of the drug-smuggling criminal networks that concern President Trump. They’ll make more money by continuing to successfully bypass laws and buy off border agents as they always have.
So, if Canada and Mexico rolled President Trump over the issue of tariffs, let’s hope they left him happy with the results. If we can turn his one-month tariff pause into a permanent return to relatively free trade, we’ll all be a lot better off. That will be especially true if we can divert the president’s attention to DOGE and the more promising business of cutting the size and expense of government.
National Post