Trump fires salvo on North American trade pact
Summary
In promising 25% tariffs on all goods from Mexico and Canada, Donald Trump has signaled his intention to upend the USMCA and wring concessions on immigration and fentanyl.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%. The Chinese yuan shed 0.3% against the greenback in offshore trading.
He also promised to levy additional tariffs of 10% on Chinese imports, citing what he says is China’s failure to regulate the chemicals that go into fentanyl. Many Chinese products are already subject to average levies of about 15% after the first phase of the trade war that kicked off in 2018, during Trump’s first term in office.
The major question is whether the threats are a negotiating ploy to wring concessions on trade and other policy priorities from U.S. trading partners, or the start of a sustained campaign to reshape global trade and the American economy.
Either way, foreign leaders, business executives and economists are bracing for fresh disruption to a world economy that has just emerged from a searing encounter with high inflation and rocketing interest rates, as well as continued friction over trade.
“Trump’s statement leaves little doubt that the U.S. stands at the threshold of a new era of trade protectionism," said Eswar Prasad, professor of economics and trade policy at Cornell University, and a former head of the International Monetary Fund’s China division. “Trump’s clear determination to use tariffs as a tool of international diplomacy will have significant disruptive effects on U.S. and global trade."
A 10% extra tariff on Chinese imports is “an opening salvo," said Joe Brusuelas, chief economist at global accounting firm RSM.
On the campaign trail, Trump said he would hit imports from China with tariffs of 60% or more. Most analysts expect Trump to ratchet up tariffs on Chinese goods, further tighten restrictions on the export of U.S. technology to China, and curtail Chinese investment in the U.S. in an effort to drastically reduce economic ties between the world’s biggest economies and geopolitical rivals.
“A lot of people expect Trump to be a negotiator, so I think this is a beginning of discussions or beginning of negotiations," said Michael Hart, the president of the American Chamber of Commerce in China, in an interview in Beijing Tuesday on the sidelines of a conference on global supply chains.
The threatened tariffs on Mexico and Canada are the bigger surprise, and suggest Trump is eager to reopen the U.S.-Mexico-Canada Agreement, a free-trade accord that came into force in 2020. The USMCA replaced the decades-old Nafta pact, which Trump repeatedly described as the “worst trade deal ever made" for widening the U.S. trade deficit and costing America millions of manufacturing jobs, especially in the auto sector.
The tariff threat suggests Trump is seeking to include immigration, security and drugs in a negotiation that usually revolves only around trade, as well as accelerate a planned review of the USMCA scheduled for 2026, said Alberto Villarreal, managing director of Nepanoa, a Chicago-based consulting firm that provides services for companies wanting to set up shop in Mexico.
“If Trump follows through with imposing immediate and unilateral tariffs, this would mean ‘going nuclear’ on USMCA," he said.
Tight economic links between the U.S., Canada and Mexico mean that disrupting trade with tariffs would have far-reaching effects.
Tariffs would likely drive up the price of steel and aluminum in the U.S. because Canada and Mexico are major suppliers of those metals to the U.S. market. The U.S. also buys almost all of Canada’s oil.
U.S. automakers including General Motors and Ford have spent decades planning their factory footprints around free trade between the three countries. About 16% of vehicles that will be sold in the U.S. this year will have been built in Mexico, or roughly 2.5 million cars, trucks and SUVs, according to a forecast from research firm Wards Intelligence. Vehicles manufactured in Canada will account for about 7% of U.S. sales.
Tariffs could hit the automotive supply base hard, potentially pushing up prices in the U.S. Hundreds of parts suppliers operate in Mexico, feeding both local factories and U.S. plants. Some parts cross the border several times in various stages of production before landing in a finished vehicle, said Mark Barrott, head of the automotive and mobility practice at consulting firm Plante Moran.
“Every time that would be subject to a tariff. Those costs are all likely to fall on the consumer," he said Monday, before Trump’s posting on the planned tariffs.
If Trump carries out his tariff threat, Mexico should retaliate, leveling tariffs on U.S. corn growers, milk and pork exporters and other sectors that are among the president-elect’s most important supporters, said Ildefonso Guajardo, who served as economy minister and led Mexico’s negotiations for the creation of the USMCA.
In 2018, Mexico responded to U.S. tariffs on its steel exports by imposing matching tariffs on U.S. steel. It was also among the first countries to target key Republican districts in retaliation to Trump’s tariffs by slapping import duties on other U.S. goods including pork, cheese, apples and Bourbon.
“Trump said he negotiated a North America trade treaty that was the best in history," said Guajardo. “I would use his treaty to retaliate in the same magnitude against his most important backers if he tries to hurt Mexican exports."
Trump has threatened Mexico with tariffs before. During his first term in office, Trump threatened Mexico with 25% tariffs if it didn’t stop thousands of migrants from crossing into the U.S. across its southern border. Then-President Andrés Manuel López Obrador deployed thousands of National Guard members to contain U.S.-bound migrants. The tariff threat was dropped.
If Mexico can limit migration and fentanyl trafficking—and discourage Chinese firms from shipping goods to the U.S. via Mexico, another Trump policy goal—then tariffs could be avoided, said Benito Berber, chief economist for the Americas at Natixis.
“The fact that [Trump] is doing it so early is perhaps a sign of wanting to negotiate quickly," said Berber, chief economist for the Americas at Natixis. “Mexico will offer something, which he will accept as soon as he is president."
Canadian Deputy Prime Minister Chrystia Freeland and Public Safety Minister Dominic LeBlancsaid in a statement late on Monday that Canadian law-enforcement agencies are strengthening their ability to detect opioids flowing south to the U.S., a nod to Trump’s concern over fentanyl. They also noted that Canada buys more from the U.S. than China, Japan, France and the U.K. combined, and provides about 60% of all the oil the U.S. imports from foreign countries.
“We will of course continue to discuss these issues with the incoming administration," they said.
Yoko Kubota, Vipal Monga, Bob Tita and Mike Colias contributed to this article.
Write to Jason Douglas at jason.douglas@wsj.com, Anthony Harrup at anthony.harrup@wsj.com and José de Córdoba at jose.decordoba@wsj.com