As President-elect Donald Trump prepares to take office next month, one thing is clear. That means he's wasting no time implementing the policies he campaigned on. President Trump knows he has two years to act before Republicans take control of both chambers of Congress.
A key post-election development was President Trump's threat to increase tariffs on Canada and Mexico.25 percentAnd for China,10 percent. If such measures were implemented, they would have important implications, considering the following points: These three countries are the United States' largest trading partners.And they account for about 45 percent of U.S. imports.
Financial markets have taken the news with a bang, as many investors see the threat as a bargaining tactic to extract concessions. They also Next review of the U.S.-Mexico-Canada Agreementis scheduled for 2026, and President Trump may intend to modify it.
To understand what's at stake, you have to consider why Trump repealed the bill. North American Free Trade Agreement during his first term.
NAFTA established a free trade area in North America and went into effect in early 1994, as Europe was preparing to launch the eurozone at the end of the decade. It called for the immediate elimination of tariffs on most products produced by the three member countries, and the removal of most remaining barriers over 15 years.
president Clinton predicted that NAFTA would create 1 million jobs in the United States.The first five years, he said in his remarks at the signing ceremony. When that didn't happen, manufacturing workers accused NAFTA of sending jobs to Mexico, where wages were significantly lower than in the United States.
Trump raised the issue during his 2016 presidential campaign, calling NAFTA “the worst trade deal in history.” When the USMCA agreement was signed in mid-2020, he touted it as:The best and most important trade deal in history Made in America. ” The Trump administration had expected 75,000 manufacturing jobs to be created, but the outbreak of the coronavirus disease (COVID-19) pandemic thwarted that.
One of the main provisions is that USMCA creates new incentives to build cars and trucks in North America. The law requires that 75 percent of auto parts be made in one of the three countries, and also requires that more auto parts be made by workers making $16 an hour or more, which is advantageous for the United States. was considered.
So why is President Trump now trying to jeopardize the deal by threatening tariffs on Mexico and Canada?
The reason President Trump has stated is that he wants to ensure that both countries take appropriate measures to prevent illegal immigration and drugs from entering the United States, but why should the same penalties apply to Canada as they do to Mexico? I wonder if it is? After all, the flow of illegal immigration and drugs has increased significantly through the U.S. southern border.
Christopher Sands, Director, Wilson Center Canada Institutenotes that border and immigration cooperation will be part of the 2026 USMCA review, and it is not unprecedented for commitments in these areas to be included in a revised agreement. He points out that the USMCA also included environmental initiatives within the body of the agreement.
His advice is that there is plenty of time to build a negotiating position, so “threats should be used as a prelude to negotiations.”
My view is that President Trump is trying to close a loophole that allows China to avoid tariffs by locating facilities in countries that don't have high tariffs.
For example, at the initial stage of a trade dispute, China could reroute its exports through MexicoAnd Vietnam. Accordingly, U.S. imports of Chinese goods decreased by approximately $110 billion from 2018 to 2023, while imports from Mexico and Vietnam increased by approximately $130 billion and $70 billion, respectively.
President Trump now plans to make it more difficult for countries to avoid tariffs. During the presidential election campaign, President Trump threatens to increase tariffs on electric cars made in Mexico by Chinese companiesChinese companies have not produced a single car in the country yet, but the growth rate is between 100 and 200 percent.
So how are companies dealing with tariff uncertainty?
The most common method is to order goods overseas well before tariffs take effect. As reported by CNBC, Uncertainty among U.S. shippers is also rising. Logistics firm CH Robinson said it was responding to inquiries about moving cargo forward ahead of the potential tariff hike, and Everstream Analytics reported that inventories were already rising.
Nevertheless, some companies face challenges when deciding where to locate their production facilities. The Economist notes that several American companies have suspended investment in Mexico. Including Tesla. Operated by Elon Musk.
Adding to the uncertainty is the prospect that countries may retaliate. Mexican President Claudia Sheinbaum said: Mexico could impose its own tariffs in retaliation If President Trump raises tariffs. Canadian Prime Minister Justin Trudeau Canada also vowed to retaliate. If Trump follows through on his threats.
It is too early to tell how these developments will play out, but one thing is clear: If Mexico and Canada retaliate; The most visible impact on the US will be rising oil and gas prices.. However, the costs would be significantly higher in Mexico and Canada because of their greater dependence on the US market.
My conclusion is that while investors and business leaders may not take President Trump's threats at face value, it would be a mistake to ignore them completely. If Trump continues on the path he has advocated, his actions could have an unexpected impact on the global economy.
Dr. Nicholas Sargen is an economic consultant with Fort Washington Investment Advisors and affiliated with the University of Virginia Darden School of Business. He has written three books including:Investing in the Trump Era. Impact of economic policy on financial markets.
