Donald Trump's long-standing trade war has finally begun.
The Trump administration slapped Canada, Mexico and China on Tuesday with big new tariffs, spurring retaliation from other countries, selling markets and new horrors about the future of the US economy.
Ultimately, Trump excels at the threat of several months ago, shortly after Trump set a 25% tariff on Canadian and Mexican imports and a 10% tariff on Canadian energy imports. Trump also raised the tariffs he imposed on Chinese imports last month to 20% from 10% last month.
Canada will quickly fight back by imposing a 25% tariff on certain goods imported from the US, and will receive more threats within a few weeks if Trump fails to reverse the course. China has announced its own retaliation measures against certain American agricultural exports and high-tech companies, but Mexican officials have pledged to respond in the coming days.
It's likely coming more – Trump said last week that new tariffs on the European Union will also be ready soon.
In the short term, Americans can be at higher prices for many products or goods that are made with imported or imported components, from cars to electronics, produce, and gasoline (US imported Canadian crude). Meanwhile, American companies, such as the agriculture industry, exporting products to these countries, will be hit hard by retaliatory tariffs.
But if this is all heading in the long run, it's obviously far from here on out, and depends on two main questions.
First: What was the endgame Trump liked in his trade war? And secondly: how bad is the economic fallout of a home?
Does Trump think of himself as negotiating before the deal, or is he trying to permanently overhaul the economic system?
Trump repeatedly said he planned to impose massive tariffs on foreign imports during the presidential election and spoke in passionate terms. Contrary to traditional economic wisdom, he argued that his tariffs would not be flawed. They boost the domestic industry, take jobs back to the US, and increase their income significantly (enable him to cut more taxes). “Customers” is “the most beautiful word in the dictionary,” he said.
Economists and investors generally view this as a complete stupidity, pointing out that tariffs make imported goods (and US-made products using imported components like cars) more expensive for American consumers, while at the same time keeping American exporters more widespread, slowing market panic and recession more widely, putting market panic and recession at risk. Trump is not driven by these debates.
But while it's clear that Trump loves tariffs, it's not very clear exactly what he thinks he's trying to achieve with them.
Sometimes it appears that Trump views tariff threats primarily as negotiation tactics and wins policy concessions in dealing with other countries. This is something investors have generally wanted. Tariffs are a short-term stance, and Trump will ultimately declare victory, move on and sign a “big beautiful deal” that he can boast while returning to something like business as usual.
But Trump and certain advisors also sometimes speak of his ambitions in more epic terms. Trump, for example, suggests that a huge amount of new tariff revenue could allow him to abolish income taxes.
Sometimes his sympathy appears to be tilted towards “Autarky.” This is the idea that the US should rely solely on what it can make at home and be completely independent of the global trading system. “There's no supply chain. We should put them all in the US. He said in 2020.
Because the United States is so interconnected in the global trading system, this is an immeasurable change with a massive collapse of living standards, so few people literally take Trump on this. But if he really wants to push the economy further in this direction at least a lot more, we can cause more confusion.
How bad is economic fallout?
Another big question that lies in Trump's decision-making is how bad it is to stay home with the financial pain from all of this.
Investors and founding Republicans have long hoped that Trump would not be serious about his trade war. They also hope that if he pushes it forward, the bad market response will convince him to seek an exit to save his face.
Already there are a variety of economic signs. Inventory has decreased. Consumer trust has been reduced in part due to all the uncertainty from Trump's chaotic actions. Large retailers say they will raise prices due to tariffs. The Atlanta Fed model predicts a surprising, significant decline in GDP growth in the first quarter (though that forecast is currently an outlier). Agricultural Republicans are concerned that the industry in their homes will be attacked.
These signs are certainly ominous, but it is important to keep them in perspective. We have not yet reached the point of a recession or a complete economic crisis.
As of noon Tuesday, the Dow Jones industrial average had fallen until the mid-January location and only to the Nasdaq in November (recent concerns about whether AI stocks were overvalued).
Tariffs, and the uncertainty that comes with them, are not warmly greeted by investors, but there is far more to the economy than tariff levels. And we still don't know if Trumpnomics is actually causing enough damage to push the economy into a recession.
But what's very clear is that the prices of many things American consumers regularly buy will rise. Considering how President Joe Biden's popularity has been hit by inflation, you'd think Trump is worried about this.
But since the election, Trump has repeatedly said he disagreed that he won, primarily because of inflation. (Voters' anger over immigration was more important, he says.) Conveniently, this allows Trump to justify pursuing tariff policies that raise prices. And we will soon see what the American people are thinking about it.
