Imagine that a longtime friend complains that you’ve repeatedly tracked mud into his house and threatens to trash your house in return. You endeavor to wipe your feet, perhaps even taking your shoes off altogether, yet the threats continue. Eventually, you have to question the friendship. This is where the US stands with Canada and Mexico, our closest trade partners, as the threat of tariffs continues to erode generations of economic goodwill.
Despite both Canada and Mexico attempting to accede to US demands, they are now faced with renewed saber-rattling. While both countries will likely try to placate, it is becoming clear that both countries have begun questioning the role they want the US to play in their economies.
Canada’s Trade Minister, Mary Ng, continues to pursue a “trade diversification strategy.” In an interview, she noted that she was recently in Europe and has plans to visit “Australia, Singapore, and Brunai” and is bringing “hundreds of Canadian businesses… with [her].” She’s even encouraging Canadian businesses to find sources for “[parts] or whatever it is that you need for your business” other than the United States, in countries “where Canada has a trade agreement.” Mexico, by comparison, has a new free trade deal with the European Union and President Sheinbaum has met with leaders from powerhouses like China and Japan. Both Canada and Mexico are also partners of the Trans-Pacific Partnership – which President Trump withdrew the US from in 2017 – which is looking to add as many as nine new members, including China and Taiwan.
This is a massive shift in US international relations.
For context, Canada sends over 75 percent of its exports to the US. Mexico, 84 percent. The US receives 29 percent of its imports from these two countries alone. Canada’s diversification strategy has been long in the making, but its intent has changed. Now, they are less focused on supplementing US trade, but to supplant it. Mexico’s efforts belie similar logic. Neither country wants to be held hostage by American whims.
Tariffs have been sold to the American people as a means of boosting the US economy and as a panacea for virtually all our ills, from our grotesque national debt to our opioid crisis. Unfortunately, they stand to backfire spectacularly, not least the recent plunge in stock prices. Tariffs drive costs and uncertainty up for American businesses, particularly in manufacturing, which relies heavily on raw materials and intermediate goods imported for their production processes. This, in turn, reduces job growth and the number of jobs available in this important sector. The deleterious effects of this are already evident, with stock markets plunging immediately following their implementation. It is only a matter of time until the labor market catches up with the stock market.
Tariffs also raise prices for consumers, who are already beleaguered by high prices thanks to the high inflation following the pandemic. Higher prices and lower job prospects are not a recipe for economic success. Now, we’re seeing two of our major trading partners actively trying to do less business with the US overall.
The economic damage of higher prices and reduced job growth can be reversed pretty easily. But the damage to trade relationships, like with friendships, can take years to rebuild and is often never quite the same. The Canadian (and Mexican) people have placed tremendous faith in the continuation of free trade between the three North American countries. That faith, as some have come to realize, may have been misplaced. As Justin Trudeau said, “Today the United States launched a trade war against Canada, their closest partner and ally, their closest friend.” The events of the last six weeks have already put a strain on the friendship between Canada and the US; Trudeau told reporters, “This is a time to hit back hard and to demonstrate that a fight with Canada will have no winners.” The same will be realized with Mexico, with President Sheibaum announcing retaliatory measures on Sunday.
Once Canada and Mexico secure new trading partners, they will be less likely to come back in force with the first olive branch from the US. China stands ready to fill the gap left behind in both countries from reducing their trade with the US.
It’s time to put the hammer that is tariff policy to bed once and for all. Instead, we should be seeking bilateral reductions in overall trade restrictions where possible and unilateral reductions where they are not. Doing so would boost domestic manufacturing, lower prices for all Americans, and create new, viable jobs for all Americans – exactly what President Trump promised on the campaign trail.
