President Trump has said he will impose a flat 25% tariff on goods coming from Canada and Mexico. It is important to mention that it is not clear whether sweeping tariffs will be imposed, and if so, when and to what extent. Whether tariffs are being used as a negotiation strategy, a threat, or are being seriously considered will become clearer in the next few weeks and months.
If tariffs will be limited to keep an election promise, the impact may not be as severe as a real and sustained levy. If the tariffs are imposed as currently reported and calibrations are made in response to market reactions, it may help reduce tensions and uncertainty. But this may still come at a cost.
The Cost of Past Tariffs on the US Economy
Recall that farmers in the U.S. had to be paid a significant subsidy by the federal government after the retaliatory actions by China in response to the 10% tariffs imposed in 2018 by the U.S. on $300 billion worth of imports. The tariffs on $300 billion worth of goods imported from China raised some revenue but added to the U.S. national debt partially because of the subsidies. It cost the U.S. more than $20 billion, and economists believe this was a direct result of the tariffs. The trade deficit with China was higher two years after the tariff imposition, and U.S. jobs were lost, which had the opposite effect.
For purposes of this article, let’s assume the tariffs will be kept at 25% and will be sustained. What impact will it have on the U.S.? Look at the hard data. For the eleven months ending November 2024, total imports into the U.S. were valued at $3.74 trillion compared to exports of $2.92 trillion.
Trade Imbalance With Canada and Mexico
The imports and exports to Canada and Mexico during that period were 28% and 32% of the corresponding figures with the entire world. The exports to the two countries were $0.63 trillion, while the imports were $0.84 trillion. The trade imbalance with Canada and Mexico was about 20% of that of the entire world in 2024, almost the same as that with Europe. The imbalance with China was about 24%. The Canadian and Mexican share of the imports and exports are high because of the history, proximity, and easy access via land.
The U.S. imports agricultural products, appliances, automobiles, automobile parts, crude oil, electronics, medical instruments, petroleum gas, and other products from the two countries. The exports to these two countries include aircraft, chemicals, grains, machinery, motor vehicle parts, petroleum and coal products, plastics, resins, semiconductors, and others.
With the change in administrations since 2016, there has not been much stability in how the U.S. works with its main trading partners. We have gone from a tariff regime to a more trade-friendly regime and now back to a tariff regime.
Impact of Tariffs on Long-Term Trade Relationships
Such wild swings could have many short-term and even long-term effects. This includes a redrawing of the supply chains. Mexico and Canada may look towards forming more favorable trade agreements with Asia, Europe, and Latin American countries, not just for the short term but for the long term, because they may view the U.S. as an unreliable trade partner.
Semiconductor chips can be imported from Taiwan. Automobiles and parts can be sold from Canada and Mexico to countries in Asia, Europe, and Latin America. The United States could also produce more automobiles domestically and rely on Japanese companies in the U.S. to scale up their production. This could take time and increase costs to the consumer, leading to an increase in inflation again.
A supply chain is no longer a chain but a complex web because of the numerous players, each with its own economic, political, and sociological challenges, not to mention the constant changes each is facing. A tariff on one or two countries could lead to a long-term realignment of companies, countries, and supply chains. The logistics costs will also increase because we are now having to trade with countries that are farther away, not accessible by land, and with whom there are no well-established supply chains.
Another crisis that is looming pertains to immigration policy changes. The construction and service industries could be severely hit, leading to a reversal of the downward trend in inflation.
The ability of high-tech companies to hire may also be severely impacted due to the lack of affordable housing and therefore, the willingness of employees to relocate. The recent weather-related events could also add to this problem, at least in the short term. The U.S. has witnessed a housing crisis since the COVID-19 pandemic when more employees began working from home and continued to do so for a part of the week.
The recent changes in immigration policy may exacerbate the housing crisis. While many of the immigration actions are targeted towards illegal immigrants, the high-tech talent that is recruited from around the world on a short- and long-term basis could interpret that they are not welcome.
My view is that the changes in tariffs and immigration policies could, at a minimum, create much uncertainty in the business world. These actions and the uncertainty can lead to unintended consequences, including a reduction in the growth of the economy, higher inflation, and potential job losses.
