This is an incredibly fast-moving story, to the extent that by the time you read this, the latest decision or news on tariffs between the US and its North American neighbours (not to mention China) will have shifted on.
So perhaps the best thing we can do here is to give you some context on how big a deal the imposition of tariffs here would be.
The key thing to remember is that North America has been, in effect, a free trade zone for decades. Goods move back and forth across the borders so frequently that the number of crossings is almost incalculable.
Consider an example highlighted by the Wall Street Journal recently. It pointed out that a piston – a component of a car component, might cross the border, back and forth between Canada and the US and Mexico, six times before it actually reaches a customer.
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Right now, it doesn’t incur any fees on each of those crossings; tariffs change that picture – and completely change the economics of making stuff.
Now, there are some deeper long-term discussions that could be had about the merits of making a car in one place versus another, but in the short run, the implication of these tariffs will be inflation. That’s almost inescapable.
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If it suddenly costs 25% more to bring a piston across from Canada into the US then imagine extrapolating that into every single component making that journey each day: it means the price of many goods goes up.
How many? That’s hard to say, but consider that between them, Canada, Mexico and China account for around 40% of all US imports.
They account for almost 60% of energy imports. So while the objective of these tariffs might be (we still don’t really have a clear picture since various different administration figures give various different explanations) to rebuild American manufacturing, it takes years to get factories built. In the intervening period, tariffs spell higher costs for American consumers.
Read more:
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And the upshot of those higher costs is lower economic activity.
Not long ago, most of the high-frequency economic measures were suggesting the US economy remained robust.
But in recent weeks, high-frequency measures of activity have suggested the US economy is facing a very sharp slowdown. Indeed, the “GDPNow” Nowcast measure from the Atlanta Fed recently pointed to the US economy contracting at an annualised rate of 2.8% in the first quarter of the year.
In other words, America may now be in recession. Not, perhaps, the start Donald Trump would have hoped for. But having inflicted so much disruption and uncertainty on manufacturers and consumers via his tariff policy, it surely can’t come as too much of a surprise.
