Trump is upping the rhetoric on Mexico, Canada, and China on top of previous tariff threats. Who will be hardest hit?
Import/Export data from Trading Economics, chart by Mish Threat to Scrap USMCAThe Wall Street Journal writes
Donald Trump’s new tariff pledges send a clear signal that he wants to rewrite the terms of North America’s free-trade pact and follow through with plans to hit China with tariffs, demonstrating to allies and adversaries alike that he is serious about renewing confrontation over a global trading system that he believes costs the U.S. dearly.
On his Truth Social social-media platform on Monday, Trump said he would levy tariffs of 25% on imports of all goods from Mexico and Canada, accusing both countries of facilitating illegal immigration and fentanyl abuse in the U.S. The Mexican peso fell 1.4% against the dollar in Asian trading Tuesday, while the Canadian dollar lost 1%.
Mexican President Claudia Sheinbaum said Mexico would retaliate if Trump imposed tariffs, as it did in 2018 when it responded to levies on its steel exports by imposing matching tariffs on U.S. steel and slapping duties on other goods including pork, cheeses, apples and Bourbon.
“President Trump, threats and tariffs won’t be the way to address the migration phenomenon or drug use in the United States,” Sheinbaum said at her daily news conference Tuesday morning. “One tariff will be followed by another, and so on until we put companies at risk,” she said, referring to U.S. carmakers such as General Motors, Stellantis and Ford, which she said arrived in Mexico 80 years ago.
Impact on AutosThe US imports $130 billion of vehicles from Mexico and another $56 billion from Canada.A 25 percent tariff on vehicles would, in theory, cost US auto manufactures about $46.5 billion.But the manufacturers would not east this cost, they would hike prices by $46.5 billion.Impact on Electrical EquipmentThe US imports $86 billion of electrical equipment from Mexico and another $10 billion from Canada.A 25 percent tariff on electrical equipment would, in theory, cost US auto manufactures about $24.0 billion.But the manufacturers would not east this cost, they would hike prices by $24 billion.RetaliationIt is ridiculous to believe Mexico and Canada would not retaliate.They would do so by hiking tariffs on US goods by 25 percent, or by turning to China, Asia or the EU for supplies instead.US exports would shrink in retaliation. Also US sales of autos and electronics will drop due to price hikes.One can go through the above math on every category. Take a look at plastics. Why does Mexico need $21 billion in plastics from the US and why does Canada need $15 billion?Mexican and Canadian importers will seek a lower cost alternative. Why not the EU or China? There are switching costs of course, but 25 percent is one hell of an incentive.Even if there is no retaliation, costs would rise in Mexico, Canada, and the US as a result of such nonsense.The result would be stagflationary, higher prices and lower growth.US Imports – Goods Only – China, Canada, Mexico 2023
US imports China, Canada, Mexico, World
Tax Hikes (If Collected, But They Won’t Be)
Tax Hike $550 BillionThat’s a tax hike of $550 billion assuming the US collected it all, which of course is preposterous.Unlike China which relatively imports little from the US, Canada and Mexico have plenty of scope for retaliation as the lead chart shows. Here is the broader export picture.US Exports – Goods Only – China, Canada, Mexico 2023
Whereas China would strike back at the US with agricultural imports, Canada and Mexico both have ample means to retaliate tit-for-tat.In what fantasyland world does it make sense for the US to up tariffs by 25 percent when Mexico and Canada would likely do the same?Which States Trade the Most with Mexico?
The above chart is courtesy of the Voronoi report
Decades of cross-border transactions have integrated the North American economy to such a degree that today each US state has its own fascinating trade connection with Mexico.
This has been the case under both NAFTA and the subsequent United States—Mexico—Canada Agreement (USMCA), which was signed in 2018 but essentially modernized the existing agreement. The market for light and medium vehicles in North America was estimated in 2020 to be worth over $700B.
From auto-parts and related goods to finished vehicles, transportation equipment remains the largest two-way trading category between Mexico and many US border states across the Southwest and Midwest.
This list includes Texas, California, and (interestingly) Michigan, the former auto capital of the world and a border state on the other side of the country. Part of this continued vehicular dominance is in no small part due to a USMCA provision requiring automakers to source at least 75% of their car parts from North American sources.
If Trump scraps USMCA, that 75% North America requirement would be null and void.Trump Threatens to Cancel His Own “Best Ever” Trade DealYesterday, I noted
Trump says he will unilaterally scrap his own allegedly “Best in History” trade deal with huge tariff hikes on our top two trading partners. Is this constitutional?
I doubt the move would be constitutional, but who cares about that?MAGA fans who scream at Biden’s unconstitutional executive orders are mostly cheering Trump’s Make Tariffs Great again (MTGA) policy.No One Wins Trade WarsA reader asked “Who do you think is gonna win that one?”I replied: Nobody will win this because nobody wins trade wars.The Art of Total Bullshit
Bear in mind USMCA was essentially the same deal as NAFTA.But in one key retrospect USMCA was worse. Trump agreed to let Mexican courts instead of US courts to settle some trade disputes. How foolish is that?Trade Is Not BilateralA fundamental mistake is that nearly everyone, especially Trump, believes trade is bilateral and there is a winner and loser to every deal.Here is a better way of looking at things.
Trade Wars Are Easy to Win Key Points
How can one not brag about impressive results like those? And Trump is. So I am willing to give Trump full credit for these impressive net results.Totals Goods Balance of Trade
NAFTA/USMCA accounts for 34 percent of the deficit increase since 2017. And USMCA accounts for 57 percent of the deficit increase since Trump signed the deal.This is why we don’t use the words “best ever” lightly.It’s an amazing performance.What Happened?Trade is not bilateral. We improved the deficits with China at the primary expense of increasing the deficit in Mexico, Canada, Taiwan, Vietnam, and South Korea.Some will argue the shift is good. But how much is Chinese exports rebranded as “Made in Vietnam” or “Made in Mexico”?He’s Got the Whole World In His HandsTrump now threatens to put tariffs on the whole world. That’ll teach em!And if that doesn’t work (or start WWIII with China), then Trump will bully the entire rest of the world into putting 60 percent tariffs on China, Vietnam, and Mexico.In response, China would cut off the supply of rare earth minerals to the world. After all, if no one trades with you, then don’t supply anyone with materials they need to produce anything, especially weapons and microchips.Critical Materials RiskThe US Department of Energy has placed some of the rare earth minerals we need for weapons systems, windmills, batteries, missiles, microchips, and aircraft on a critical materials list.have been warning about this for yearsChina controls more than 80% of the world’s supply of tungsten and about 90% of global magnesium productionChina has an effective monopoly over processing major heavy rare earths – Dysprosium (Dy) and Terbium (Tb), and Light Rare Earths – Neodymium (Nd) and Praseodymium (Pr). It takes decades to get a mine up in the US and mining is one thing. Processing is the second. China controls about 90% of global rare earth process.No other county has the processing technology.Trump’s Proposed Tariffs Are a Tax on Consumers, Primarily the PoorIn response to my November 22, 2024 post a number of readers commented they did not give a damn about the poor.Since the poor don’t matter, I fail to see what else can possibly go wrong.China’s Export Curb ThreatIn response to tariff threats, please note
In a warning shot to the Trump administration, China tightens export controls on some dual-use minerals.
Some might be worried about a Smoot-Hawley type reaction in which every country responds in kind to Trump’s tariffs, starting with Mexico, Canada, and the EU, and culminating with China blocking exports of all rare earth elements.Not me. Trade wars are good and easy to win. And the tax on the poor doesn’t matter. Nor does the $46.5 billion tax on cars, the $24.0 billion tax on electronics, or the combined $550 Billion tax on everything.More By This Author:Inventory Of New Homes Is Soaring, But Where Are The Buyers? New Home Sales Plunge 17.3 Percent, Largest Decline Since July 2013Rent Is Growing Faster Than Income In 82 Of Top 100 Metro Areas
