Update 841 — Much Ado about Tariffs:
For Border Security or Optical Illusion?
Donald Trump pulled the North American economy away from a gratuitous self-imposed mutually-assured disaster this week — for the time being — averting a trade war that would have threatened key American industrial sectors, supply chain dislocation, unemployment, and inflation for the sake of border security measures that were mostly in place already.
The temporary suspension of his sweeping 25 percent tariffs against all Mexican and Canadian products save energy, limited to 10 percent, got us… what? The redeployment of 10,000 Mexican National Guard members and the appointment of a Canadian “Fentanyl Czar.” Meanwhile, a universal set of 10 percent tariffs against all Chinese products remains in place. For details on this week’s trade deals, see below.
Best,
Dana
The Week’s Tariff Actions
Over the weekend, President Trump announced he would be wielding his executive power to levy tariffs on Canada, Mexico, and China – the United States’ three largest trading partners, accounting for nearly half of all United States imports. As part of Trump’s bevy of executive orders on his first day in office, he declared a national emergency at the southern border – citing the influx of illegal immigrants and fentanyl into the U.S. – which unlocked his authority to levy sweeping tariffs.
The tariffs, originally set to take effect on Tuesday, February 4, included:
- 25 percent tariff on imports from Mexico,
- 25 percent tariff on imports from Canada,
- 10 percent tariff on energy and oil resources,
- and a 10 percent tariff on goods from China.
But in a whirlwind of deals between Trump and his Canadian and Mexican counterparts on Monday, the two countries announced concessions and were given a 30-day pause on the tariffs while negotiations continue.
President of Mexico Claudia Sheinbaum said she would deploy 10,000 members of the Mexican National Guard to the country’s northern border and establish two high-level working groups with the U.S. on security and trade.
And in drawn-out negotiations beginning with his trip to Mar-A-Lago in November, Canadian Prime Minister Justin Trudeau eventually backed down from his plans to place a 25 percent retaliatory tariff on $155 billion of U.S. goods – including alcohol, lumber, and appliances – beginning with a drawback of $30 billion worth of goods this week, implementing the rest later in the month.
Instead, Canada agreed to continue with a $900 million border investment – which it announced weeks ago. In his statement on X, Trudeau reasserted that “Nearly 10,000 frontline personnel are and will be working on protecting the border”, signaling to his domestic audience this is not a total concession as they have always had a strong presence at their border while satisfying Trump’s expectations. In Trumpian language, Trudeau did commit to appoint a new “Fentanyl Czar” (in 2024 the Canadian Border Services Agency reported that only 17.6 pounds of fentanyl were smuggled from Canada into the U.S.) and to designate cartels as terrorist organizations. He also pledged a “new intelligence directive on organized crime” costing $139 million.
So, what did Trump actually get out of these negotiations? Mexico and Canada already have a substantial number of personnel at their borders with the United States and Canada’s investments in border security were announced weeks ago. This display of Trump theater may begin to answer the question reeling in the minds of American business owners, consumers, and world leaders – are Trump’s tariff threats just his new favorite negotiating tool?
While that possibility may ease markets, this drama is still unsustainably chaotic for businesses as they project their plans for the next four years as threatened tariffs could be levied over and above current levels at any time. Although Trump cited non-economic policy objectives this time around, he may return to his larger qualms with wide trade deficits later on and level these same tariff threats if imbalances persist. How far will he then go to upend the global trading system? To be determined.
All that remains from Trump’s threats is the 10 percent tariff on all Chinese products, which took effect just after midnight on Tuesday. Beijing filed a complaint with the World Trade Organization (WTO) and swiftly implemented its own tariffs of 15 percent on American liquefied natural gas and 10 percent on coal, farm machinery, and automobiles. These retaliatory tariffs total about $20 billion of annual imports, a small fraction of the $450 billion of goods subject to Trump’s tariffs on China. Negotiations between Trump and Xi are expected this week with these retaliatory tariffs set to take effect on February 10. Tariffs were not the only Chinese retaliatory measure. China also responded through other mediums, with an embargo on critical minerals used to make high-tech products, as well as an antimonopoly investigation into Google. Beijing’s reactions were relatively measured when compared to its retaliatory targeting of vital agricultural products in the trade war of Trump’s first term and left the door open for negotiation. More could follow.
de minimis Exception
Hidden in Monday’s executive order is also the closing of the de minimis loophole for the small-scale delivery of goods entering the country. This loophole allows individual shipments of goods entering the United States with a value of less than $800 to avoid import duties, taxes, and oversight from Customs and Border Patrol. With Canada and Mexico’s executive orders put on pause, the only goods affected are those from China. Only ten years ago, an average of 140 million shipments claiming the exclusion entered the United States annually, but these shipments have since skyrocketed to over a billion per year. Addressing the de minimis loophole has bipartisan support and both chambers have introduced bills to curb or fully close the loophole, but these efforts have yet to see further action.
Tariff Authority’s Shift to the Executive Branch
Constitutionally, Congress was assigned the power to lay and collect duties through tariffs and to regulate commerce with foreign nations and did so until the 1930s. The disastrous effects of the Smoot-Hawley Tariff Act of 1930 deepened the Great Depression and led Congress to shift said powers to the executive branch to revitalize the American economy with flexibility and speed not available via legislative action. Subsequent laws enacted by Congress gave the President broad authority to levy tariffs and to negotiate reciprocal trade agreements.
The need for rapid responses to geopolitical dynamics in the 1950s and 60s led Congress to shift even more power to the President. Eventually, the International Emergency Economic Powers Act (IEEPA) granted the President sweeping powers to regulate international commerce in times of national emergency. Once the President has declared a crisis – as Trump did in his day one Executive Order – he can freeze foreign assets, restrict trade, and implement sanctions immediately without the procedural restraints from the traditional avenue of tariffs – Sections 232, 301 etc. – which require a lengthy reporting and review process.
IEEPA has never been used by a President to levy tariffs – until now. While some members of Congress may be growing wary of the executive branch’s expanding role in implementing tariffs, bills introduced in the 116th, 117th, and 118th Congresses to limit the President’s authority to use the IEEPA were unsuccessful.
The vast expansion of executive power coupled with Trump’s fixation on tariffs surely informed his intentions to use this economic tool as a central part of his agenda in his second term. His obsession with tariffs dates back decades and he has long been critical of the free trade ecosystem. In his first term, Trump levied significant tariffs on $370 billion worth of goods from China that have largely been maintained under the Biden administration which only expanded tariffs in targeted instances – e.g. electric vehicles, batteries, and solar panels.
There are justified instances where tariffs can be used with real economic and national security rationales. The Biden administration tried to take a more limited strategic approach to target critical industries. This strategy has a better chance of producing the traditional intended effects of tariffs — boosting domestic manufacturing and protecting vital industries.
Trump, on the other hand, is deploying tariffs as a tool in different ways: as an aggressive, sometimes noneconomic negotiation tactic, to remedy “unfair trade practices” in the hopes of “unrigging” the trading system for the U.S., and raising revenue – which he plans to collect by establishing an External Revenue Service to collect duties rather than through the U.S. Customs and Border Protection office. It is clear that the President views tariffs as a threat to be used on adversaries and allies alike, in addition to raising revenue to offset plans for another round of tax cuts that will go predominantly to wealthy Americans and corporations.
On the latter point, Trump and congressional Republicans have suggested that tariff revenue could help provide pay-fors in their planned reconciliation measure to extend expiring provisions of the Trump 2017 TCJA tax cuts, enact new tax cuts, and increase spending on immigration and defense. Tariffs levied via executive action would not be included in or receive a vote as a part of the reconciliation measure, meaning they could not formally lower its deficit impact. But Republicans could point to tariff revenue from Trump’s executive actions and try to argue it counteracts a reconciliation bill that adds considerably to the deficit.
Concerning Consequences for the U.S. Economy
While a North American trade war has been largely avoided – for now – the lingering threat of Trump implementing 25 percent tariffs on Canada and Mexico upon perceived violation of persistent trade imbalances, along with 10 percent tariffs levied this week on China, would have grim economic consequences. Tariffs are duties paid by companies importing goods to the United States. Simply put – and contrary to Trump’s rhetoric – Canada, Mexico and China would not be paying for the tariffs. American companies pay the tariff amount to the United States Customs and Border Protection and are then forced to make a decision: absorb the higher costs and lower their profit margins or pass them along to consumers.
The Tax Foundation found that these proposals would shrink economic output, as measured by GDP, by 0.4 percent. Lower-income households disproportionately feel the burden of such sweeping tariff plans as these households typically consume more imported goods than higher-income households. Tariffs are widely regarded as a regressive tax by economists, and, while it would cost the typical American household over $1,200 per year, according to Peterson Institute for International Economics estimates, those in the lowest and second quintile of income would be subject to a more significant financial burden:
Source: PIIE
The automobile industry felt particular pressure this week – it imports more from Mexico and Canada than any other sector. This industry’s supply chain is incredibly interdependent between Canada, Mexico, and the United States. Car parts can cross the border numerous times before being placed into a vehicle.
The speed at which our North American neighbors came to the negotiating table underscores how devastating these tariffs would be on their economies. According to the Council on Foreign Relations, more than 80 percent of Mexico’s exports account for 15 percent of U.S. imports. These imports include cars, machinery and food products. The United States imports more than 70 percent of Canada’s exports – accounting for 14 percent of our imports:
Source: Council on Foreign Relations
Political Fallout
Democrats sounded the alarm, critiquing the President’s tariff announcements. Leadership and rank-and-file members of the party pointed to the hypocrisy of Trump’s campaign promises to lower costs for Americans given the fact that such sweeping tariffs will lead to higher prices.
Republicans, on the other hand, are in a precarious position. Some lawmakers are critical of the use of tariffs generally and are especially sensitive to retaliatory tariffs depending on their constituencies. Republicans are largely falling into line with the notion of tariffs being used as a negotiating tool on the hot topic of border security. Those who are most outspoken have included Senator Mitch McConnell (R-KY) who said the tariffs would “drive the cost of everything up” and would “be paid for by American consumers.” Senator Ron Johnson (R-WI) echoed McConnell and made clear he is in line with “the market’s concern” while pushing for “free trade around the world.”
What – or Who – is Next?
Looking ahead, American partners around the world are wondering who will be next. The President has already put the European Union on alert after pointing to deficits in auto and farm products. Trump has also announced he is considering tariffs on semiconductor chips, pharmaceuticals, steel, aluminum, oil, and gas as soon as February 18. North American leaders have critical negotiations beginning this summer for the United States-Mexico-Canada Trade Agreement (USMCA) set to be renewed in 2026.
Also on the horizon are the April deadlines from an Executive Order for agencies like the Department of Commerce, Treasury, and Defense along with the United States Trade Representative to review various aspects of trade policy and eventually provide their recommendations to the President. Some of these reviews include conducting studies on:
- trade deficits,
- Section 301 tariffs,
- America’s role in the WTO,
- the feasibility of establishing an External Revenue Service,
- and the Permanent Normal Trade Relations (PNTR) status with the PRC.
Conclusion
As the dust settles on an eventful few days, the United States may still end up in a multi-front trade war. Trump is not hesitating to punish trade partners regardless of their status as allies. While in the short term, American businesses and consumers face economic turmoil in the face of unprecedented tariffs, the United States risks standing alone in a time of growing geopolitical and economic uncertainty.