Tariff man’s risky bet

WASHINGTON, DC – In a dramatic escalation of trade tensions, US President Donald Trump has imposed an across-the-board 10 per cent tariff on goods from China, threatened a 25 per cent tariff on imports from Canada and Mexico, and vowed similar measures against the European Union. His stated objective is to secure deals to halt the flow of drugs and unauthorized immigration into the United States, suggesting that tariffs will now be an instrument of border security. But trade barriers on this scale could destabilise global markets, drive up prices for American consumers, and potentially drag the US, and the world, into recession. In betting that the potential economic fallout is worth the gains in border security, Trump is gambling with America’s long-term influence and prosperity. 

Yes, US federal law grants the president significant authority to impose tariffs without waiting for Congress to act. Under the International Emergency Economic Powers Act of 1977, a president who declares a national emergency over an external threat can regulate trade, though this has traditionally meant economic sanctions, not tariffs. Moreover, Section 232 of the Trade Expansion Act of 1962 empowers the executive to adjust imports when national security is at risk. Trump previously used this authority, in 2018, to levy tariffs on steel and aluminum imports from Canada, Mexico and the EU. 

Nonetheless, the pivot from financial sanctions to comprehensive tariffs marks a significant shift. Financial sanctions offer greater flexibility, precision, and global impact than tariffs, because they can be swiftly imposed to target specific individuals or entities, leveraging America’s dominance in the global financial system. They impose costs on targeted countries by restricting access to the banking and payment systems on which international financial and commercial transactions rely. Such sanctions are supported by stringent monitoring, global cooperation, and dollar dominance, making them robust and hard to evade. Moreover, countries like China, Canada and Mexico cannot easily retaliate against US financial sanctions, because their currencies are not widely used by others.

By contrast, tariffs (taxes on imported goods) can be easily circumvented, owing to loopholes in trade practices and the complexities of monitoring physical goods. Tariffs drive up prices for US consumers and companies relying on intermediate inputs. And because Canada, Mexico, and China are major trade partners, the first, second and third largest export markets for the US, they can inflict pain on the US by retaliating with their own tariffs. 

The targeted countries responded quickly following Trump’s announcement of the new tariffs last weekend. Before Trump announced a 30-day “pause” on the Canadian and Mexican tariffs, Canada said it would impose 25 per cent tariffs on $106 billion (CAD $155 billion) worth of US goods, raising the possibility of a trade war that could disrupt deeply intertwined North American supply chains. Political relations are strained. Canada argues that illegal immigration and fentanyl entering the US from its territory amount to only around 1 per cent of the total influx, though US Customs and Border Protection reports that approximately 7 per cent of illegal immigration came from the northern border, a figure that has been steadily rising since 2022. 

Still, Trump’s approach does seem to have worked on America’s neighbors. Though Mexican President Claudia Sheinbaum ordered retaliatory tariffs of up to 20 per cent on selected US imports, excluding the auto industry, she also agreed to deploy 10,000 soldiers to Mexico’s borders to combat fentanyl and other drug trafficking. This outcome reflects the asymmetry of the relationship. While the US is Mexico’s largest export market, Mexico is only the third largest market for US exports. With such a high trade dependency, Mexico was the first to cede to US demands.

Within hours, Canada had also followed suit. It will deploy personnel to the border to execute its $1.3 billion border plan, as well as appoint a “fentanyl czar” to address US concerns about illicit drug flows. While Canada and the US are one another’s number one export markets, Canadian exports to the US account for approximately 20 per cent of Canada’s GDP, whereas American exports to Canada account for only 1 per cent of US GDP. 

For its part, China has condemned the 10 per cent tariff on its goods (which comes on top of existing levies) and announced that it will challenge the measure at the World Trade Organisation. Dismissing the Trump administration’s accusations about fentanyl, it describes the opioid epidemic as “America’s problem.” 

China’s continued show of resolve suggests that it may be less likely to capitulate than Trump hopes. With its vast internal market and extensive global trade relationships, China has the capacity to withstand US tariffs and implement powerful countermeasures of its own. Though it, too, is more dependent on the US market than the US is on the Chinese market, America’s heavy reliance on intermediate inputs from China will cause assured pain if the trade war intensifies. 

In issuing his threats, Trump is betting that Canada, Mexico and China will remain tethered to the US market, maximising his administration’s negotiating leverage on non-trade issues. But punishing these key partners could backfire by pushing them toward alternative suppliers and weakening America’s long-term economic influence. America’s national security strategy relies on maintaining close economic relations with allies, and creating economic distance from its rivals. A trade war makes this much more difficult to achieve. 

To be sure, Mexico and Canada’s swift concessions demonstrates that leveraging economic dependencies can achieve policy goals without significant self-inflicted harm in the short term, and Trump might try the same tactic against other countries that rely on the US market. Beyond his stated goals, imposing tariffs on major trade partners allows him to say that he is protecting US industries, encouraging domestic production, and potentially creating jobs and reducing the trade deficit – a recurring theme of his campaign. If foreign exporters adjust their export prices downward to accommodate lower US demand, the US could well reap terms-of-trade gains by benefiting from lower import prices relative to export prices.

But this optimal tariff argument ignores the substantial risks that Trump is taking. A generalized trade war will make everyone worse off. Further escalations could disrupt global supply chains, negatively impact the US and global economy, and harm political relationships. In the future, more countries will have even stronger reasons to try to reduce their economic and political reliance on the US. Ultimately, the economic and political fallout from Trump’s policies could undermine the very goals they aim to achieve, leading to greater costs than benefits for the US.

Carla Norrlöf, Professor of Political Science at the University of Toronto, is a non-resident senior fellow at the Atlantic Council. Copyright: Project Syndicate, 2025. www.project-syndicate.org