We all know Donald Trump loves a tariff. Not long ago he said it was his favourite word in the English language.
But one thing that might perplex people somewhat is why he is quite so keen on imposing tariffs on Mexico and Canada. After all, in his first term, his main focus when it came to trade was China.
It was under Donald Trump that swingeing new tariffs were imposed on China and Vietnam (often seen as a backdoor conduit for Chinese goods). Canada and Mexico, on the other hand, got a brand new trade deal to take the place of the long-standing NAFTA agreement.
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So what changed? While the president has talked repeatedly about how the tariffs will deter Mexico and Canada from sending opioids into the US, a more compelling explanation comes when you look at the American trade data.
There you see that since those tariffs were imposed in his first term, imports from China to the US have fallen quite considerably. Meanwhile, imports from Mexico and Canada have risen sharply, with Mexico now overtaking China as the biggest importer into the US.
If there’s one thing Donald Trump hates, about as much as he loves tariffs, it’s trade deficits – where you import more goods from a country than you export. Economists see deficits as an inevitable function of being a modern developed economy; Trump sees them as a kind of punishment – a subsidy for foreign countries.
Trump’s odd way of looking at the world
This is, to put it lightly, an odd way of looking at the world. While there are very legitimate concerns about the structure of the US economy, its inability to build its manufacturing sector and the impact of Chinese manufacturing overcapacity on the rest of the world, seeing all deficits as inherently bad is bizarre. Nonetheless, if you view the world that way, you won’t like the look of the US trade position with Mexico.
Look at those numbers and you see that the trade deficit has ballooned in recent years – and not just because of America sucking up lots of Mexican oil. The US is also importing far more cars from Mexico than it sends there.
That is, to a large extent, a function of that free trade deal, which has encouraged car manufacturers (including some American manufacturers) to assemble their cars in Mexico. However, there are also suspicions that the Mexican deficit with the US is, to some extent, a function of the way the global trading system has shifted in the past half-decade.
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Where once goods would flow directly from China to the US, there’s evidence to suggest many of them are instead flowing, mostly in the form of components, to “third countries”, including Mexico, and then being assembled into finished products and sent into the US. And this process might accelerate in the coming years.
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Look at the number of cars flowing from China to Mexico in recent years and it’s rising rapidly.
All of which is to say, there are some intriguing dynamics in international trade which have raised eyebrows in the White House.
What’s going to happen?
What would the impact of tariffs be? Well, most economic models suggest they would lift inflation and reduce economic growth. In short, they would be bad – especially if levied on nearly all goods.
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But, this being Donald Trump, there are still big questions about precisely how these tariffs would actually be applied. The past few weeks have been chaotic for the normally dull world of trade economics. The coming years will be more chaotic still.
