Untangling the MAGA mind on tariffs

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To hear Donald Trump explain it, tariffs are a tool to bring other countries in line on national-security issues, such as fentanyl trafficking and illegal migration. Or rather, they’re a means of rebalancing trading relationships. Or maybe they’re a mechanism to force foreign manufacturers to set up shop in the United States and bring factory jobs back to the Rust Belt.

Three weeks into his term, the new U.S. President has threatened trade wars with allies and adversaries alike. The latest development came on Sunday, when Mr. Trump said he would announce 25-per-cent tariffs the next day on all steel and aluminum imports. So far, Mr. Trump has offered an array of explanations for his tariff proposals that blur economic and security goals.

Mr. Trump’s comments have been dizzying for Canadian politicians and businesses trying to navigate the protectionist swing from the U.S. He likes to keep his opponents off balance to achieve leverage. And Mr. Trump genuinely seems to believe that tariffs are a multitool with which to pursue various goals at once – some of which are at odds with each other.

This sets the stage for mistakes and miscalculations on the part of financial markets and Mr. Trump’s negotiating partners. However, if you listen closely to the President and his lieutenants, it’s not hard to discern certain themes that will guide the new administration’s use of tariffs, and certain threats that will shape Canada’s economic relationship with the U.S. in the coming years.

The most striking development compared with Mr. Trump’s first presidency is the readiness to use tariffs as an extension of – or substitute for – diplomacy.

When Colombia pushed back against U.S. efforts to deport migrants by military aircraft two weeks ago, Mr. Trump ordered a 25-per-cent tariff on the country. He reversed course hours later when Colombia softened its objections. The recent threat of 25-per-cent tariffs against Canada and Mexico – separate from the latest tariff plans on steel and aluminum – runs in this vein.

“It is something that the administration will keep in its back pocket and use at any opportunity,” Christopher Hernandez-Roy, deputy director of the Americas program at the Center for Strategic and International Studies in Washington, said in an interview.

“So today, those justifications are migration and fentanyl. … And it’s possible that there are other things, like defence [spending], where tariffs might be used in the future to signal discontent and get Canada to move more forcefully.”

On the economic front, Mr. Trump and his team have described several aims. They want to use revenue from tariffs to help pay for tax cuts. They want to shrink America’s trade deficit with other countries, which they see as a scorecard of economic success, contrary to mainstream economic thinking. And they want to incentivize foreign companies to build factories in the U.S.

The last two goals were evident on Friday, when Mr. Trump hosted Japanese Prime Minister Shigeru Ishiba in Washington. In a joint press conference at the White House, Mr. Trump said he would put tariffs on Japan if the U.S. trade deficit with the Asian country, which averaged around US$60-billion over the past five years, was not eliminated.

But he also appeared ready to cut a deal, hailing Japan’s intentions to buy more liquefied natural gas from Alaska and welcoming investment announcements in the U.S. from Japanese firms SoftBank, Toyota and Nippon Steel – the last of which was recently prevented from acquiring U.S. Steel Corp., but is now working on a new investment plan for the company, according to Mr. Trump.

Mr. Trump also said he would announce “reciprocal” tariffs in the coming days that will apply to “everybody.” He offered few details, but hinted at a series of bilateral arrangements, where the U.S. would raise tariffs to match those of other countries, rather than implementing a 10-per-cent to 20-per-cent universal tariff, as promised during the election campaign.

“I think that’s the only fair way to do it, that way nobody is hurt. They charge us. We charge them. It’s the same thing. And I seem to be going in that line, as opposed to a flat-fee tariff,” Mr. Trump said.

While shrinking America’s trade deficits and sucking in foreign investment are clear goals of MAGA trade policy, they also stand in tension. The net inflow of capital is the flip side of the net inflow of goods. That means that a surge of investment will tend to increase, not decrease, the trade deficit.

It’s not the only paradox in Mr. Trump’s policy mix. Trade wars reduce imports, which could hinder the use of tariff revenue to offset tax cuts. Likewise, the U.S. dollar will appreciate when the country slaps tariffs on trade partners. That might help offset the inflationary impact of tariffs for American consumers, but it will make U.S. exports less competitive in international markets.

“If Trump is trying to get rid of the deficit … it’s just going to fail,” Daniel Trefler, economics professor at the University of Toronto, said in an interview last week. The U.S. trade deficit stems from high consumption and low savings rates in the country, alongside massive fiscal deficits, Prof. Trefler said. “Trump is going to get more and more angry about the fact that he can’t get rid of his structural deficit.”

Canada emerged from its first trade skirmish with Mr. Trump last week relatively unscathed, making minor concessions on border security in return for a 30-day reprieve on tariff threats. But, as was evident in Mr. Trump’s comments on steel and aluminum tariffs on Sunday, it’s far from being in the clear.

Together, Canada’s steel and aluminum industries employ more than 30,000 Canadians directly, and both rely heavily on the U.S. market. Steel exports from Canada to the U.S. fell by 38 per cent when Mr. Trump put tariffs on the industry in 2018.

Mr. Trump has also told his administration to investigate a number of trade grievances and report back with plans to address them by April 1. The United States-Mexico-Canada Agreement (USMCA), which Mr. Trump signed during his first term to replace the North American Free Trade Agreement, will be under the microscope.

Jamieson Greer, Mr. Trump’s nominee for United States trade representative (USTR), said in a confirmation hearing last week that the USMCA review would start “right out the gate.” He suggested he would push for stricter North American content rules for auto production, target Canada’s digital services tax, and push for better market access for American farmers.

Indeed, the new U.S. administration seems intent on cracking open Canada’s supply-managed dairy and poultry industries. Howard Lutnick, Mr. Trump’s pick for commerce secretary, put it bluntly in his confirmation hearing: “Canada treats our dairy farmers horribly. That’s got to end. If Canada is going to rely on America for its economic growth, how about you treat our farmers, our ranchers and our fishermen with respect.”

Attacks on Canada are part of a broader push to remake the global trading system, with the overarching goal of improving U.S. terms of trade and shifting supply chains away from China. While Mr. Trump backed away from the spat with Canada and Mexico last week, he slapped another 10-per-cent tariff on Chinese goods, ramping up the trade war he started in his first term.

Former USTR Robert Lighthizer, the architect of Mr. Trump’s trade policy during his first term in office, spelled out one potential vision in a New York Times essay last week.

“Countries with democratic governments and mostly free economies should come together and create a new trade regime. This system could enforce balance by having two tiers of tariffs,” Mr. Lighthizer wrote. Countries outside the group would face higher tariffs, while those within it “would pay lower tariffs, and they could be adjusted over time to ensure balance.”

Mr. Lighthizer is outside the administration this time around, but his ideas remain influential and urgent for the Trump team. His protégé Mr. Greer spelled it out last week in his confirmation hearing: “I am convinced that we have a relatively short window of time to restructure the international trading system to better serve our interests.”