Trump doesn’t seem to know why he launched a giant trade war

Donald Trump just imposed a 25 percent tariff on virtually all goods produced by America’s two largest trading partners — Canada and Mexico. He simultaneously established a 20 percent across-the-board tariff on Chinese goods. As a result, America’s average tariff level is now higher than at any time since the 1940s. Meanwhile, China and Canada immediately retaliated against Trump’s duties, with the former imposing a 15 percent tariff on American agricultural products and the latter putting a 25 percent tariff on $30 billion of US goods. Mexico has vowed to mount retaliatory tariffs of its own. This trade war could have far-reaching consequences. Trump’s tariffs have already triggered a stock market sell-off and cooling of manufacturing activity. And economists have estimated that the trade policy will cost the typical US household more than $1,200 a year, as the prices of myriad goods rise. All this raises the question: Why has the US president chosen to upend trade relations on the North American continent? The stakes of this question are high, since it could determine how long Trump’s massive tariffs remain in effect. Unfortunately, the president himself does not seem to know the answer. In recent weeks, Trump has provided five different — and contradictory — justifications for his tariffs on Mexico and Canada, none of which make much sense: 1) Trump’s tariffs on Canada and Mexico are meant to secure America’s borders Officially, the North American tariffs are intended to fight “a drug war,” not a trade war. Trump claims that our neighbors to the north and south have been abetting the transfer of fentanyl and undocumented immigrants into the United States — and that this constitutes a “national emergency.” By imposing steep tariffs on Canada and Mexico, Trump ostensibly aims to coerce the two nations into cutting off the flow of drugs and migrants. But this policy is irrational. Canada plays virtually no role in the trafficking of fentanyl. And the Mexican government has already ramped up enforcement against drug cartels while deterring migrants from entering the US (often through brutal means). These efforts appear to have slowed fentanyl imports significantly. They have not succeeded in shutting down the fentanyl trade entirely. But that is not a reasonable demand: If the U.S. cannot stop drugs from infiltrating its own prisons, how could the Mexican government monitor its entire nation so meticulously as to prevent an extremely lightweight narcotic from ever crossing its northern border? Nevertheless, if Trump’s tariffs were intended solely as a diplomatic tool for influencing Mexican and Canadian border policy, then they might be lifted in short order. Canada and Mexico could present plans for cracking down on drugs and migrants, and Trump could declare victory, as he seemed to do last month when he initially delayed these tariffs in response to Mexican and Canadian concessions. But these tariffs are not solely about winning the drug war — at least, according to the president. 2) Unless, the tariffs are actually meant to force companies to relocate production to the United States, thereby closing the trade deficit On Tuesday morning, the president posed on Truth Social, “IF COMPANIES MOVE TO THE UNITED STATES, THERE ARE NO TARIFFS!!!” Here, Trump suggests that his tariffs are not meant to be a temporary device for combatting fentanyl imports, so much as a durable means of coercing companies into moving factories into the US. After all, if the tariffs are only temporary, companies would have little reason to change their investment decisions in light of them. And Trump’s remarks Tuesday were consistent with his previous commentary on this issue. Last month, Trump told his social media followers, “We pay hundreds of Billions of Dollars to SUBSIDIZE Canada. Why? There is no reason. We don’t need anything they have. We have unlimited Energy, should make our own Cars, and have more Lumber than we can ever use.” He further lamented that “The USA has major deficits with Canada, Mexico, and China (and almost all countries!), owes 36 Trillion Dollars, and we’re not going to be the ‘Stupid Country’ any longer. MAKE YOUR PRODUCT IN THE USA AND THERE ARE NO TARIFFS!” These remarks imply that America should maintain steep tariffs on Canada and Mexico in perpetuity, since it has little need for their products, and is currently “subsidizing” those countries by running a trade deficit with them. But this is a terrible justification for Trump’s policy on several levels. For one thing, the president’s tariffs on Canada and Mexico apply to all goods — including agricultural products that the United States cannot possibly produce at scale, such as papayas and other tropical fruits. Trump’s duties also increase the cost of foreign-made parts to American manufacturers, thereby creating a disincentive to locate factories in the US. According to one estimate, Trump’s tariffs on Canada and Mexico would increase the US auto industries’ annual costs by $60 billion. That will force US car companies to raise prices, thereby hurting their competitiveness in foreign markets. Meanwhile, auto companies located overseas will be able to purchase Mexican and Canadian parts at lower rates. This basic dynamic — in which tariffs increase the production costs of US firms — led Trump’s past tariffs to backfire during his first term: According to a 2019 Federal Reserve analysis, Trump’s tariffs reduced manufacturing employment in affected industries. Separately, the idea that running a trade deficit with a country is tantamount to “subsidizing” it reflects a gross misunderstanding of economics. You purchase more goods from your grocery store than it purchases from you. In that sense, you run a “trade deficit” with your grocer. But it does not follow that when you hand over your currency in exchange for a shopping cart full of food, you have just made a charitable donation to Stop & Shop. 3) Unless, Trump’s tariffs are meant to force Canada and Mexico to modestly revise the terms of their trade with the US On Tuesday morning, Trump suggested that his real grievance with Canada is that it has been committing unfair trade practices against the United States. “Canada doesn’t allow American Banks to do business in Canada, but their banks flood the American Market,” Trump wrote on Truth Social. “Oh, that seems fair to me, doesn’t it?” This is not a good justification for Trump’s tariffs for a couple of reasons. North American trade is currently governed by the United States-Mexico-Canada Agreement — a trade deal that Trump himself brokered. The US will have the opportunity to renegotiate that deal in 2026. Seeking to improve the terms of North American trade through an orderly legal process — rather than a trade war that will make the people of all three nations poorer — seems prudent. More fundamentally, though, Trump’s claim that Canada prohibits American banks from doing business within its borders is simply false. In fact, US banks have been operating in Canada for more than a century. 4) Unless, Trump’s tariffs are meant to coerce Canada into becoming the 51st state Last month, Trump posted on social media, “Canada should become our Cherished 51st State. Much lower taxes, and far better military protection for the people of Canada — AND NO TARIFFS!” Trump has repeatedly referenced his desire to annex Canada when speaking about his 25 percent tariffs on the nation. And Canadian Prime Minister Justin Trudeau has said that he believes Trump is quite serious about “absorbing our country.” Following a meeting with Trudeau, the leader of the Alberta Federation of Labor, Gil McGowan, said on X, “I can confirm that Trudeau said his assessment is that what Trump really wants is not action on fentanyl or immigration or even the trade deficit, what he really wants is to either dominate Canada or take it outright.” Immiserating a country so that you can conquer it is not a morally legitimate goal for trade policy. It also is unlikely to work. Canadians overwhelmingly oppose joining the United States. And they are unlikely to warm to that concept after seeing the American government deliberately inflict economic pain upon them. 5) Unless, Trump’s tariffs are meant to raise revenue Finally, the Trump administration has repeatedly suggested that it sees high tariffs as a means of raising revenue, thereby enabling the US to cut income tax rates. A tariff is effectively a sales tax on foreign goods, paid by importing companies, which then typically pass on the costs to consumers. Trump has floated the idea of replacing the income tax entirely with tariffs and proposed the creation of an “External Revenue Service” to collect duties. You cannot offset permanent tax cuts with temporary tariffs. So if Trump’s goal with his North American tariffs is to generate revenue, they may stay in place for some time. But this would not be a good idea. Replacing income taxes with tariffs is highly regressive, as working-class households dedicate a higher share of their incomes to imported goods than wealthy ones do. More fundamentally though, using tariffs as a revenue source is incompatible with all of Trump’s other trade goals. If the president wants to use these duties as a tool for forcing Canada and Mexico to increase their border security — or open up protected sectors of their economies — then he needs to be willing to lift the tariffs once those nations comply with his wishes. In that case, the tariffs will generate no long-term revenue. If Trump actually wants to remake the American economy — such that companies move all their factories to the US — then tariffs will provide less and less revenue over time, as American consumers purchase fewer and fewer foreign goods. And if Trump’s true aim is to force Canada into joining the United States, then all tariffs on Canadian goods would be lifted upon its entry into the union. All this makes it very difficult to say precisely why Trump has blown up trade relations with two of America’s closest allies. What’s clear is that the president’s reasoning is deeply confused. Simply put, Trump has decided to make the peoples of the United States, Canada, and Mexico poorer for no good reason.

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Trump doesn’t seem to know why he launched a giant trade war