Tariffs are coming. Maybe tomorrow? Some reading/questions to interpret the results.
The tariff “will he won’t he” cycle continued on January 31 as the Trump administration continues to insist that tariffs on Canada, Mexico and China are coming February 1. This followed previous reporting that they would only come into effect March 1. The trigger is insufficient actions to stop the flow of fentanyl (and perhaps migrants) into the US. However, that national security justification is aliding with other concerns about trade practices and revenue goals.
Given the uncertainty, this post summarizes some things to watch and things to read to interpret whatever policies are announced tomorrow and in the coming days. Whatever happens in the next few hours, tariffs will be a key tool used by the administration and one that market actors, policymakers and consumers will need to grapple with.
Some of the things I’ll be looking at in any announcement
Scope of the tariffs: Do the tariffs cover all goods or are there immediate exclusions? If all goods are included, the economic impacts are greater both from these tariffs and from any potential retaliation. In particular, oil would likely have most near-term effect on US consumers (although refinery margins and discounts might provide an offset). Excluding oil might avoid fuel disruptions, but would leave some of the biggest near-term effects on food (grom Mexico) especially perishables which are tough to stockpile. Fuel aside, the biggest trading area is the auto sector which is highly integrated with cars and parts frequently crossing the border.
What does the exclusion process look like (transparent or not)? A lot of lobbying has been going on for weeks and more will come. Trump’s team has been critical of the exemptions granted to the China tariffs in his last administration. How will they manage it this time.
Timing: When do the tariffs come into effect? If using some authorities, public comment or reports are needed, delaying the start time. For some of today journalists suggested that the administration might use 232 tariffs (used for steel and aluminum in the last Trump administration among others). These and section 301 tariffs require a period of comment. In this case businesses might continue to try to front-run the tariffs and continue stockpiling. To avoid this, Trump could try to use the powers of IEEPA via his border emergency to try to force them into action immediately, though this is somewhat untested.
How long will they last? The economic effect of these taxes will depend on their duration. If market actors believe that they are to be brief, they may choose to draw down inventories or shift production lines and pile them up on one side of the border. Taxes like this are a one off shock but how long they last will impact the second order effects.
Justification/Trigger for lifting: Coercive measures imposed for leverage/negotiation need to have clear signals about what it would take to lift them -otherwise they are likely to remain in place for extensive time. The interlinked trade would hurt all trading partners – and indeed more trade is at stake than that covered by tariffs in the first Trump administration.
How do these tariffs connect with other planned tariffs? On 20 January, the Trump administration launched several trade reviews including on trade with these countries. These are mostly due 1 April and tariffs are likely to follow or at least their threats. Are these tariffs imposed for national security purposes (border issues) or are there also trade related issues involved? Is there a clear ask with which countries could comply and then see tariffs lifted or do other justifications bleed in? Like with financial sanctions, the more triggers for a coercive measure, the less able it is to be lifted as it is harder to comply.
What Negotiations: In any delayed implementation, Trump could be seeking to retain leverage to get what he sees as a good deal. In that context there is debate within the administration about the best tools to use, how to avoid roiling markets too much and how to avoid undermining Trump’s broader goals of boosting US production without boosting prices. At the same time, some members of Congress would like him to hold off on any quick tariffs due to their desire for revenues from tariffs, perhaps universal ones across the globe. More clarity on final tariff levels may come in the budget negotiations.
Any Retaliation? Mexico and Canada both have threatened retaliation to Trump’s tariffs, details are scarce, though Canadians have been articulating more targets. These countries will want to try to keep targets asymmetric, but the relative sizes make things hard. Exemptions to US tariffs, may complicate choice of retaliation targets. If implementation is deferred due to a comment period, US trading partners could propose investigations of their own as well as announcing compliance measures.
China has not pre-announced plans to retaliate to these measures directly, but continues to use its own chokepoints including in critical minerals and battery tech. China in the past targeted key agricultural products and could do the same, although imports of US ag products are down sharply in recent years as Brazil has taken US market share in soybeans and other grains.
Some things to read:
I’ve read a lot of insightful commentary on the tariff effects over the last few months. The following is a short subjective sample, which no doubt we will be adding to. In practice, I ended up reading more on the US-Canada trade patterns, but the impacts on Mexico are no less important especially as tariffs could call into question the recent increase in trade and investment, from both US and Global players which have seen Mexico as a key base to access the US market.
On overall macro effects: The PIIE’s Warwick McKibbin and Marcus Noland summarize their work on the risks of tariffs and other parts of the Trump agenda in this piece. They highlight the aggregate impacts and use a multi-sector model. Still, the sector based dislocations could change the impact. Overall, all countries suffer, the US less due to size of economy and less open economy, but the shift in taxes is very regressive. Brad Setser spelled out the risks of these tariffs and questions about the broad agenda including policy inconsistencies.
On oil market impacts: The US increase in oil production reduced its imports from the world at least on net, but increased that from Canada which now accounts for over 4million barrels a day. Commodity Context’s Rory Johnston has a deep dive on the lack of clear alternatives to Canadian oil for US refineries, especially those in the Midwest and Mountain areas. While some sellers would likely take some hit via larger discounts, refinery margins and consumers will also pay the cost. The Atlantic Council’s David Goldwyn and Joseph Webster cover some of the same area but focus on the ways that more volatility of volume and price of imports could undermine exports. I tried to tease out the inconsistencies of putting tariffs on needed sources of heavy oil while also sanctioning adversaries and calling for cheap prices for Petroleum economist.
On Metal/mining trade impacts: CSIS’ Gracelin Baskaran writes about the cost of mineral tariffs on Canada. She estimates that US importers would pay an $11.75 billion, and rising if metal prices and uranium increase. And of course tariffs on Canadian minerals would make future efforts to develop graphite and other critical mineral mining and processing across borders that much more difficult. Notably, there’s been a lot of good writing about the potential use of trade agreements from SAFE and Silverado to support the development of critical minerals, which I’ll write about in an upcoming post.
On process: Peter Harrell has written on why IEEPA is the wrong tool to impose tariffs, especially the broad universal tariffs. IEEPA, the authority used for most financial sanctions, could theoretically be used for tariffs, and it was threatened in the first Trump administration, but many legal issues remain. Further concerns from Congress about administration encroaching on trade rules would also result, though it remains to be seen how much an obstacle that is.
Retaliation potential. The Canadian Press has been speculating about retaliation targets for some time, and Liberal leader candidate Chrystia Freeland issued a clearer list of what she would target. I wrote about one of them Alcohol on the wine substack. It may not have the largest economic impact, especially with alcohol consumption going down, but it tends to pack a political punch.
There are lots of good readings on the trade policy issues between these countries, the tradeoffs between targeting allies while also asking them to reduce Chinese imports. We will no doubt see more of them.
What are you finding useful to navigate these policy twists?
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