Trump’s tariffs, viewed from four cities

Just as he swore to do, Donald Trump signed new executive actions on Saturday, slapping 25% tariffs on Canada and Mexico, and 10% on China. Energy exports from Canada seem to be the sole major carve-out, copping a 10% tariff instead.

Now, before we dive in, here’s a sweet term to slip into conversation: strategic empathy. It’s what diplomats use to try and understand why world leaders act the way they do, without necessarily (dis)agreeing. So with that in mind, let’s kick this off in…

1. 🇺🇸 Washington DC — “crisis“

Trump’s stated rationale here is a crisis at the US borders, including both irregular migration and fentanyl. Trump campaigned on this, and we’ve covered the scourge of fentanyl before.

But this crisis is not just Trump’s rationale. It’s also now his legal basis — to enact these tariffs, he used the 1970s-era International Emergency Economic Powers Act, which is meant to empower presidents to respond to an “unusual and extraordinary threat” abroad.

Interestingly, however, Trump hasn’t specified what exactly he wants Canada, Mexico, or China to do now in return for withdrawing the tariffs. That could be for a few reasons:

• Perhaps it’s tactical, to see what concessions they’ll offer first
• Perhaps it’s just flexible, so he can declare victory at a time of his choosing, or
• Maybe it’s just a legal move to cite the border crisis in order to wrest congressional authority over to the White House, to then pursue broader motives.

Our gut is it’s all three. But then, what might Trump’s broader motives be? Again, they’re not new: frustration at the US being treated like a cash cow, and a plan to take the fiscal burden off income taxes. He’s also repeated his remarks about Canada becoming the 51st US state, which takes us up to…

2. 🇨🇦 Ottawa – “betrayal“

In what some Canadians see as his best-ever speech, Justin Trudeau has now described their sense of betrayal: after fighting and dying side-by-side as allies for generations, their American allies are now targeting a relatively balanced trade relationship, shaped by Trump’s own signature trade deal (USMCA), with executive powers ordinarily reserved for an autocratic foe like Iran or Russia, and using tariffs now likely to put hundreds of thousands of Canadian jobs at risk. And for what?

Yes, illegal border crossings from Canada have hit historic new highs in the last four years, and border authorities seized enough fentanyl to kill ~10 million folks last year. Yet also, total volumes are still very small, with Canada accounting for perhaps 1% of all US undocumented migration and fentanyl (criminal activity is by definition tough to measure).

Meanwhile, this is all happening at a very tricky time — with Trudeau resigning and others now competing to replace him, there’s a powerful political incentive for Canada’s leaders to hit back. And yet, with ~80% of its exports heading to the US, Canada is clearly also vulnerable — its central bank warns of 6% in lost growth over the next three years, while the Canadian dollar has just hit a 22-year low.

But vulnerable doesn’t mean Canada has no options: guess which country is the single largest export destination for ~36 US states? Yes, it’s Canada. And it’s now responding with ‘buy Canadian‘ efforts, plus tariffs targeting US goods made in red states: OJ from Florida, bourbon from Kentucky, and so on. The idea is to share the pain among Trump’s own base, which might then theoretically push Trump to change course.

This worked last time in 2018, but Trump is now less politically vulnerable, and you can see that in the relative silence among his own party. So then, let’s head down to…

3. 🇲🇽 Mexico City – “panic“

Mexico is even more dependent on the US than Canada — its US exports equate to around 30% of GDP (versus 20% for Canada). So some are now forecasting a deep and destabilising recession, sending more folks trying to cross the border in search of work.

But that’s not to say Mexico has no options, either. In addition to extending the olive branch in the form of stepped-up fentanyl seizures and a proposed new joint commission, President Sheinbaum is also drawing up retaliatory tariffs of her own which (like Canada) will aim to repeat past successes by targeting key US districts and states. She’s also reportedly looking at a ‘carousel’ approach, which would rotate different US businesses in and out of the firing line, to maximise the pain via uncertainty.

Anyway, to wrap it up, let’s now head over to…

4. 🇨🇳 Beijing – “relief“

Beijing is warning of its own counter-measures plus a case at the WTO, but President Xi’s overarching emotion right now may just be relief. Trump has not only slapped China with additional new tariffs way below the 60% he threatened on the campaign trail, but these new tariffs are even below what he’s now slapping on his own NATO ally (Canada).

Any WTO case is unlikely to go anywhere, simply because the WTO’s legal role has largely ground to a halt due to a US veto on new judges since Trump 1.0. China may also announce more retaliatory tariffs of its own, but it’s running out of options at this point, so its most effective response might also be its most silent: more currency devaluation to make its exports cheaper. That’s what happened under Trump 1.0, arguably worsening China’s broader global imbalance (which the US still absorbs, just less directly).

So what happens now? Trump says he’s speaking with both Trudeau and Sheinbaum today (Monday), so maybe (maybe?) we’ll see some kind of last-minute deal. But Trump’s orders also include language warning of further US tariffs if any of the three move to retaliate, which they’ve all now done (though the Mexico and China details are tbc).

The other wildcard is the market, which has influenced Trump’s thinking before. US markets open shortly, but Bitcoin has now crashed ~5% in a few hours and Asian markets didn’t fare much better, reflecting the uncertainty, ripple effects, and warnings for the US itself — taxing cars made in Mexico, for example, could hit the US firms supplying ~40% of the parts.

INTRIGUE’S TAKE

This is now looking like more than just avocados, orange juice, or even fentanyl.

Rather, Trump is talking about a complete re-ordering — if not dismantling — of a historic experiment in regional economic integration. The idea behind NAFTA and then USMCA was always to harness America’s capital, Mexico’s labour, and Canada’s resources to drive prosperity, security, and influence for all three. And of course, it’s a constant balancing act to grapple with the resulting shifts in capital, crime, talent, and labour. But a succession of US-Mexico-Canada leaders (including Trump 1.0) saw them all as issues to negotiate rather than a system to be rejected.

That said, while Trump wants to re-jig the economic order, this isn’t necessarily the same as ceding strategic space to China (though the two overlap). And this might help explain why, despite US allies in Europe reportedly being next in Trump’s sights, those US allies located closer to China (Japan, Korea, Philippines, Australia) are still managing to avoid the fray for now.

Also worth noting:

• The US-Mexico-Canada Agreement (USMCA) is due for review next year, though Canada and Mexico already see these US tariffs as treaty breaches. Meanwhile, all three are also due to co-host the FIFA World Cup next year.
• Trump’s orders also remove the $800 de minimis exemption that allows China’s e-commerce giants Temu and Shein to send packages to US buyers tax free.
• Mexico just signed a trade pact with the EU, though realistically this isn’t a replacement for the level of economic integration it has with the US next door.