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News -

On February 4, President Donald Trump imposed a 10% tariff on China shortly after reaching agreements with Canada and Mexico to delay the 25% tariffs by 30 days. But then on March 4, the tariffs on Canada, Mexico, and China came into effect.

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Tariffs -

Trump's tariffs on Chinese imports are a response to Beijing's failure to curb fentanyl precursor smuggling, while the tariff delay for Canada and Mexico follows their commitments to strengthen anti-drug smuggling efforts.

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China's response -

China responded with a 15% tariff on US coal, gas, and other goods. They also set restrictions on some mineral exports and even launched an antitrust investigation on Google.

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What is a trade war? -

As defined by Britannica, "A trade war is an economic dispute between two countries. It can occur when one country retaliates against another's perceived unfair trading practices with restrictions, such as tariffs, on imports."

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How would tariffs affect the United States? -

According to Bloomberg Economics, the new tariffs could reduce US imports overall by 15% given that nearly half of US imports come from Canada, China, and Mexico.

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Impact and consumer prices -

These tariffs could impose large costs on the economy. Things like disrupted supply chains and rising costs for businesses could become a reality. This might then result in the loss of hundreds of thousands of jobs and ultimately drive costs up for consumers.

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Oil imports -

In the US, certain sectors will be hit the hardest. Those include the automotive, energy, and food sectors. In the midwest, this could mean 0.50 cents per gallon higher gas prices given that Canada and Mexico supply over 70% of crude oil to US refineries. 

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Automakers -

A 25% tariff on Canada and Mexico would stand to raise production costs for US automakers. This could add US$3,000 to the price of some sixteen million cars that are sold each year in the US.

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Grocery costs -

Mexico is the United States' largest source of fresh produce. They actually supply over 60% of US imported vegetables and almost half of the fruit and nuts.

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How could tariffs affect Canada and Mexico? -

For both Canada and Mexico, trade makes up about 70% of their GDP. Therefore, tariffs would hit a lot harder.

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Imports -

Canada and Mexico are dependent on US trade. In fact, over 80% of Mexico's exports head North. These include cars, machinery, fruits, vegetables, and medical equipment. This subsection accounts for 15% of the total imports in the US.

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Electronics and Mexico -

The dependence is especially prominent in the north of Mexico where over US$200 billion worth of computers, electronics, transportation equipment, and other products are exported each year.

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Cars exported from Mexico -

Bloomberg Economics estimates that a unilateral tariff of 25% could cut Mexico's GDP by about 16%. Their auto industry would be hit the hardest as 80% of the cars, or some 2.5 million vehicles, produced are sent to the US alone each year.

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Refined oil -

Tariffs could disrupt Mexico’s energy sector, as the US buys 60% of its crude oil exports and supplies over 70% of Mexico’s refined oil needs.

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Canada -

The US buys over 70% of Canada's exports, a number that represents 14% of the total US imports. With the new tariffs, the energy sector in Canada will be impacted the most as they send 80% of their oil south.

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Leverage - These uneven tariff costs give the US a strong bargaining advantage over its North American partners in negotiations.

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How could tariffs affect China? -

When compared to Mexico and Canada, China is less dependent on the US and trade in general. The country has steadily reduced trade's impact on the economy over the past two decades and simultaneously ramped up domestic production.

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China's GDP -

In China today, imports and exports account for only about 37% of China’s GDP. Compare this to where it was in the early 2000s (60%) and you'll see the true difference.

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Currency weakens and trade shifts -

US tariffs have triggered currency fluctuations, with the yuan, peso, and Canadian dollar weakening, easing the impact on their exports. However, this makes US goods more expensive and less competitive abroad.

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Retaliatory tariffs could follow -

Countries like Canada, China, or Mexico might impose retaliatory tariffs on US goods. It's already been suggested by Mexico's president, Claudia Sheinbaum, that Mexico might take countermeasures.

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History repeats itself -

Mexico and Canada imposed a US$15 billion retaliatory tariff in 2018 on US products after President Trump imposed steel and aluminum tariffs. 

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Industries at risk -

It's possible that US fuel exporters could be hit the hardest if Canada or Mexico retaliates. Next in line are automakers and pharmaceutical manufacturers.

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Economic uncertainty grows -

Markets could continue to drive down the Mexican peso and Canadian dollar, furthering economic instability. There are US states that rely heavily on trade with Canada and Mexico and they are likely to feel the greatest impact.

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The ripple effect of trade wars -

Trade wars are often started to achieve some economic or political goals, however, they will invariably interfere with global supply chains, increase consumer costs, and lead to long-term economic stagnation or even geopolitical conflict.

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Lessons from history -

What we've learned from past trade conflicts is that even though nations must protect their economic interests, cooperation and open markets are best for stability and sustained growth.

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Trade barriers -

Trade barriers can provide temporary advantages. However, when they become full-blown trade wars, the overall economy tends to shrink and affects everyone involved.

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The cost of escalation -

Often, clear winners don't emerge in trade wars but instead, mutual losses. As tariffs and countermeasures escalate, businesses will struggle with the uncertainty, investors will pull back, and entire industries suffer.

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Final thoughts -

Measures that are protectionist in nature tend to do more harm than good. They show that strategic diplomacy and balanced trade practices are needed.

Sources: (Investopedia) (Britannica) (Council on Foreign Relations)

See also: Trump officials shared war plans in group chat that included journalist

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