The dangers of (writing about) tariffs.

The shelf-life of tariff analysis is getting short these days.

Today USG imposed 25% tariffs on Canada and Mexico as well as another 10% on China, all linked to fentanyl/border issues. Canada and China retaliated with trade and non-trade barriers, including a sizable dollop of agricultural products. Mexico held off on actually naming retaliatory targets, but promised them by Sunday. Perhaps, as I quipped on X, Mexico hoped not to have to implement retaliation. Maybe they won’t have to?

The actual imposition of the tariffs on North American partners was a surprise to me, narrowly, having assumed that the economic and financial costs to the US and US manufacturing would stay the hand, but it was a toss-up. I was not alone in that. I had assumed that the Chinese ones would go ahead, in part due to lack of engagement with China in the last few weeks and disinterest in using these tariffs for leverage.

Equity markets sold off sharply reversing post election gains. currencies were more subdued however, puzzling some who had assumed they would again be a stress release and source of adjustment. In part the USD stability vs the index reflects the broader strengthening on European assets, which benefits from the easing policy of Germany and hopes that Defense investments will boost available assets, growth and returns. The fact that China is not using the RMB as a shock absorber may help too also with the other Asian currencies.

Now Commerce Secretary Howard Lutnick has suggested that the President might come to a compromise with Canada and Mexico (notably not China!) and reduce tariffs or recalibrate. USG seems to have picked up on the fact that getting rid of the USMCA is an own goal that hurts rather than helps the US economy and manufacturing. Its not certain till its done and the details matter, but it does seem as though tariffs might be lowered or reduced on goods with some US content or those that meet USMCA content requirements at least. The message that with 25% tariffs, products with some US content now entered US at disadvantage to products from South Korea and Japan for example, may have resonated.

That said, it remains unclear what sort of deal will result if any. Will Canada and Mexico be treated differently? What are the concessions expected? Will retaliation be a deterrent/factored in? What will be the asks? Commitment to further rules of origin and US product measures in USMCA? Common external tariffs (which Mexico is considering and Canada did partly to match some Biden admin external tariffs?). Presumably also other moves on lumber, dairy and other considerations. Its likely a long list.

Regardless, the damage to the assumptions of the North American integrated supply chain has been done. If one of the benefits of FTA/NAFTA/USMCA was predictability that integration would allow for long-term cross-border investment, this episode has sharply undermined that predictability. That was likely a goal of the Trump administration whose first priority is local production, followed perhaps by the desire for trading partners to increase their barriers against Chinese overcapacity (what I have called fortress North America). A compromise might buy time for that adjustment, but the direction of travel is towards trying to attract investment into the US not in supporting comparative advantage or mutual benefit.

Now its definitely true that other countries have trade barriers and that the US might want to reshore some production for national security purposes, but doing so primarily with tariffs is likely to be damaging. For products that are so important, subsidies and incentives not just import deterrents will likely need to be part of the package.

That said, the US can’t be fully self-sufficient or anywhere near it as paying for all the goods the Trump administration now wants to produce at home would be very costly. Higher costs of intermediate goods would boost the costs of future exports or local production.

Looking ahead, the tariff calendar is packed.

· Steel and aluminum tariffs to kick in on 12 March and seeming likely to go ahead. They will likely be followed by intense negotiations and perhaps pledges to extend external tariffs against Chinese imputs, Voluntary export reductions, and perhaps other swaps

· Expiry of agreement with the EU (March 31?)

· Reciprocal tariff plans (April 1). These are country dependent

· Many many other trade reports (April 1)

What does this mean? I shared some thoughts today on whether Asia was a meaningful growth market for Canada? For now, expanding trade a lot would be hard, given the physical infrastructure issues for resource exports and dynamics of demand. Moreover, it’s a much tougher case for manufactured goods, especially as industry has planned for efficiencies within the north American supply chain. Looking ahead, Canada needs to continue with plans to reduce internal trade barriers, build energy infrastructure among others. Doing so would put the country in a better position to boost domestic productivity, as well as trading with the US and others as trends evolve.

Across the board, the current policy environment makes it more difficult to plan, source materials and predict consumers and supplier availability. The US economy may be entering this uncertainty from a relative high point and tight labor market, but these swings will be more challenging for business and even more so for consumers.