Trump's Tariff Gamble: Protectionism or Self-Sabotage

Trump is officially now the 47th president of the United States. Under very controversial circumstances his re-election was unexpected, to say the least. A key part of Trump's campaign revolved around bringing back jobs to the United States and becoming more “self-reliant” in essence he wanted to de-globalize. Now how does one go about deglobalizing you might ask? Tariffs.  

Image by ADS Group  

So essentially a Tariff is nothing but a tax levied on imports coming in from other countries. They are generally used to protect local industries as goods coming from outside tend to be cheaper, so they undercut the local industries and run them out of business. So where has Trump decided to aim this bazooka of tariffs? His allies, namely Mexico and Canada. 

Canada is one of the largest trade partners for the US with a total of 908 billion dollars worth of goods flowing across the border in 2023 alone. All of these goods under the North American Free Trade Agreement or NAFTA (replaced by the USMCA) flow between the countries with no tariffs or other such taxes being levied upon them. This has been massively beneficial to the US as they get access to not only Canada's large market but also access to cheap Canadian natural gas worth over 10 billion (CAN) dollars annually.

 Some might even say that the US is a larger beneficiary of NAFTA than Canada. That is why Trump's latest move comes as such a huge surprise, he has decided to hit Canada and Mexico with a 25% tariff for all goods coming into the US. Apart from the Canadian energy sector which is only slapped with a 10% tariff. 

Trump claims that these tariffs are meant to crack down on the illegal fentanyl trade and illegal immigrants coming in from Canada. He has also talked about how Canada has a positive trade deficit with the US (the US imports more goods and services than it exports to Canada) and why this is bad for the economy along with how tariffs will correct this ‘issue’. 

Luckily for Trump, these tariffs have been put on hold after discussions with Canada's prime minister Justin Trudeau. Canada has promised to implement a 1.3 billion (CAN) dollar border plan to halt the flow of illegal fentanyl. 

Mexico is also a very large trading partner for the US with a total of 807 billion dollars worth of trade taking place. Once again all of these goods fall under the NAFTA agreement and flow through the border free of tariffs and other such taxes. 

As mentioned above Trump has decided to slap Mexico with a 25% tariff for all products including those in the energy sector. Trump's main agenda and reasoning behind this decision was to stop the flow of illegal immigrants from Mexico to the US. These tariffs have also been put on a 30-day pause after discussions with the Mexican president Claudia Sheinbaum. Mexico has announced the deployment of 10,000 National Guard officers to help combat drug trafficking and illegal migration. 

Why are these tariffs a bad measure? 

Tariffs when used in moderation coupled with strategic thinking can be very effective but the way Trump seems to go about it seems nonsensical and counterproductive. So, the idea of these tariffs is to protect American jobs and industries. 

To visualize this let's take the crude oil imports, America imports 10 billion (CAN) dollars worth of natural gas annually. This natural gas is sold in the American market for cheaper as Canadians can produce more of it at lower costs. Now because of this the American natural gas manufacturers are at a disadvantage and are driven out of the market. Now that there is this 25% tariff Canadian natural gas prices will naturally rise and so the American natural gas producers will have an equal playing field if not an advantage. 

This is what Trump aims to do with these tariffs but unfortunately, that only works if you avoid looking at the bigger picture. Natural gas is not only an end product but acts as an input for many industries. Now all of the companies in these industries will have to pay higher prices which will result in them being less competitive and in turn some of these companies will be run out of business which ends up leading to a larger unemployment crisis than before. 

As Dani Rodrik, an esteemed Turkish economist also noted, “Well, I mean, not at all. I think the threatened tariffs are senseless because they’re not going to achieve anything useful.” (Making sense of Trumps tariffs with Dani Rodrik, Financial times).

 Tariffs are meant to be part of a larger well thought economic strategy, but Trump seems to be using it as an independent weapon or a reactionary measure. By imposing such outrageous tariffs without considering its broader impact, Trump is going to harm the very industries and jobs that he is trying to protect with this policy. These coming months are going to be crucial in deciding the fate of America as not only an economy but as a nation.