Monday, February 3, 2025
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ECONOMY

Trump Declares Economic War on Just About Everyone That Matters. Is a Smash-Up a Feature and Not a Bug?

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After campaigning on not wanting to start or escalate kinetic wars, Trump looks to be trying to compensate for US military weakness (as in inability to seriously beat up anyone bigger than an insurgency) by launching a massive, multi-front economic war via 25% tariffs on Mexico and Canada (ex oil), our biggest trade partners, and a further 10% increase in tariffs on our #3 trade counterpart, China. For China, an additional Trump blow is ending the “de minimus” exemption for shipments under $800, which Chinese vendors like Shein had taken advantage of to sell directly to US customers.1 Trump has threatened to impose tariffs on the EU too, which has already said it would “respond firmly”. 2

We will first sum up the state of play, and then turn to the looming question: since all experts and businesspeople, save those on the extreme lunatic fringe, know that tariffs increase product costs, which are either passed on to consumers or eaten by suppliers, can cause shortages, otherwise disrupt supply chains, and (in mature economies) are a very very expensive way to create jobs and have had little success in increasing domestic production in the US, what does the Trump team think they will accomplish?

First, a short overview. Note Canada and Mexico have already announced that they are retaliating. China so far has only said it will sue the US in the WTO, which is a wet noodle lashing, but expect more soon. The Financial Times’ overview:

Donald Trump hit Canada, Mexico and China with steep tariffs on Saturday in a move that launches a new era of trade wars between the US and three of its largest trading partners.

Trump issued an executive order applying additional tariffs of 25 per cent to all imports from Canada and Mexico, with the exception of Canadian oil and energy products, which will face a 10 per cent levy. Canada is by far the biggest foreign oil supplier to the US, accounting for about 60 per cent of its crude imports.

Imports from China will face a 10 per cent tariff over and above existing US tariffs…

The tariffs would apply from Tuesday, the White House said.

An administration official said each order contained “a retaliation clause . . . so that if any country chooses to retaliate in any way, the signal will be to take further action with respect to likely increased tariffs”.

In response, Canada’s Prime Minister Justin Trudeau announced 25 per cent tariffs on C$155bn (US$107bn) worth of goods, including US alcohol, clothing, household appliances and lumber…

Mexico’s President Claudia Sheinbaum said the country would also launch retaliatory tariffs and other measures.

It’s far too early to know what the economic effect will be; the impact of the tariffs imposed during the first Trump Administration was marginal due to how few they were and still debated.3 But it takes a lot of, erm, creativity, to depict them as a plus for citizens.

Due to the lousy state of search on Twitter and the Wall Street Journal’s own site, I am unable to again find a useful, high level background video on tariffs. It included detail on how the first term Trump tariffs achieved very little, creating hardly any jobs (<2,000) then at a very high prices, as well as some unexpected additional costs (more expensive clothes driers even though driers were not subject to tariffs). It also pointed out, with examples, that tariffs, once imposed, are rarely reverses since they create their own constituencies.

However, claims that tariff costs will be passed on to consumers are simplistic. Even though during the Biden inflation, some companies that weren’t seeing cost pressures also put through price increases, in so-called “greedflation” (we have an example of the same sort of conduct during the first term Trump price increases). However, MarketWatch reported that in 2024, on the 70 SKUs they tracked across retailers, the number of price reductions slightly exceeded increases. Critically, WalMart had started rolling back prices to gain market share.

Given how much food the US imports from Mexico and which products are most price inelastic, it seems likely that consumers will be subjected to price increases in food and other small ticket and/or essential items. This will hit already-budget stressed low and middle income consumers. Many outlets are confirming the obvious, that food costs will rise. From Reuters:

Tariff-related price increases would hit consumers’ wallets at a time when beef prices are near record highs and costs for eggs have climbed after bird flu eliminated millions of egg-laying hens. Bird flu cases in dairy cows have also reduced milk output in top-producer California….

The United States imported $195.9 billion of agricultural goods from suppliers around the world in 2023, according to U.S. Department of Agriculture and U.S. Customs data. That included nearly $86 billion from Mexico and Canada, the top two suppliers representing 44% of the total.

Up to 40% of fresh produce sold in U.S. food stores is imported, according to the National Grocers Association.

“We import most of our fresh fruit and vegetables from Mexico and Canada….” said Rob Fox, an economist and director of CoBank’s Knowledge Exchange….’”I can’t go out and plant tomatoes in Illinois in January and hope to replace them.”

About two-thirds of U.S. vegetable imports and half of its fruit and nut imports come from Mexico, according to the USDA. That includes nearly 90% of its avocados, as much as 35% of its orange juice, and 20% of its strawberries…

The threat of tariffs alone can be inflationary, said David Ortega, an economist at Michigan State University.

“Food companies are scrambling to come up with contingency plans…that adds cost to their operations,” he said.

The U.S. normally imports more than 1 million cattle from Mexico annually, though Washington has blocked shipments since late November due to the discovery of a pest in Mexico.

Canadian cattle also are shipped into the U.S. to be fattened and slaughtered. Tariffs or trade disruptions could affect products ranging from ground beef to steaks, analysts said…

“If it goes through anything like threatened, it will definitely push U.S. beef prices up significantly higher,” he [Bob Chudy, a consultant for beef importers] said of tariffs….

Prices for the hamburger meat are up 42% from four years ago.

To get more of a flavor of the breadth of the impact:

I have yet to see this Trump remark confirmed, but the flip side is the US is very dependent on China for pharmaceutical inputs and even drugs, and I did not see pharmaceuticals carved out in any of the writeups on the new tariffs levied on China:

Another big tariff-hit category is building materials, such as Canadian lumber. I am not able to gauge how price sensitive those goods are (and obviously some are more so than others). But new home sales are already showing signs of price pressure, as Wolf Richter discussed in the past week: Inventory of New Completed Single-Family Houses for Sale Spikes to Highest since 2007. Builders Prop Up Sales with Lower Prices, Bigger Incentives, Smaller Houses.

One big sector that is likely to see the crunch on the manufacturer side is autos. If you eyeball recent import data from Mexico, cars and auto parts look to constitute about 1/3. But the volumes don’t give an full picture of the impact. From the Wall Street Journal:

Take the U.S. auto industry, which is really a North American industry because supply chains in the three countries are highly integrated. In 2024 Canada supplied almost 13% of U.S. imports of auto parts and Mexico nearly 42%. Industry experts say a vehicle made on the continent goes back and forth across borders a half dozen times or more, as companies source components and add value in the most cost-effective ways.

And everyone benefits. The office of the U.S. Trade Representative says that in 2023 the industry added more than $809 billion to the U.S. economy, or about 11.2% of total U.S. manufacturing output, supporting “9.7 million direct and indirect U.S. jobs.” In 2022 the U.S. exported $75.4 billion in vehicles and parts to Canada and Mexico. That number jumped 14% in 2023 to $86.2 billion, according to the American Automotive Policy Council.

American car makers would be much less competitive without this trade. Regional integration is now an industry-wide manufacturing strategy—also employed in Japan, Korea and Europe—aimed at using a variety of high-skilled and low-cost labor markets to source components, software and assembly.

The result has been that U.S. industrial capacity in autos has grown alongside an increase in imported motor vehicles, engines and parts. From 1995-2019, imports of autos, engines and parts rose 169% while U.S. industrial capacity in autos, engines and parts rose 71%.

As the Cato Institute’s Scott Lincicome puts it, the data show that “as imports go up, U.S. production goes up.” Thousands of good-paying auto jobs in Texas, Ohio, Illinois and Michigan owe their competitiveness to this ecosystem, relying heavily on suppliers in Mexico and Canada.

US and European automakers were already running up against the limits of affordability. For instance, from Newsweek in early 2024, in Americans Can No Longer Afford Their Cars:

Both new and used car prices rose to record highs during the pandemic, as the car industry was experiencing supply chain disruptions and chip shortages. Since 2020, new car prices have risen by 30 percent, according to data shared by AI car shopping app CoPilot with Newsweek. Within the same timeframe, used car prices have jumped by 38 percent….

…cars are still really expensive for many Americans. Just 10 percent of new car listings are currently priced below $30,000, according to CoPilot. Things are not much better in the used car market, where only 28 percent of listings are currently priced below $20,000.

According to an October report by Market Watch, Americans needed an annual income of at least $100,000 to afford a car, at least if they’re following standard budgeting advice, which says you shouldn’t spend more than 10 percent of your monthly income on car-related expenses.

That means that more than 60 percent of American households currently cannot afford to buy a new car, based on Census data. For individuals, the numbers are even worse, with 82 percent of people below the $100,000 line.

The budget squeeze was already hitting sales volumes and pricing as reflected in the level of discounting rising markedly in 2024 over 2023. As readers likely know well, US officials aggressively reject cheap and cheerful Chinese EVs as a solution. That’s before getting to the fact that major automakers, namely Nissan, the Stellantis combine, and Volkswagen are in wobbly shape. Their ability to put through price increases without losing sales is limited.

And there’s a precedent for the Trump tariffs leading to bailouts:

Even Trump has admitted that his tariff regime will hurt American but is trying to spin this bug as a feature, and even more insultingly, a noble sacrifice. From The Hill,This will be the Golden Age of America! Will there be some pain? Yes, maybe (and maybe not!). But we will make America great again, and it will all be worth the price that must be paid. We are a country that is now being run with common sense — and the results will be spectacular!!!”

Some contacts on the right wing (who acknowledge that keeping the tariffs on would harm a lot of American consumers and businesses) are spinning that Trump will keep them on only for a short while, that this is yet another bluster/bargaining chip. The problem is he’s blustering with a loaded AK-47 while not observing any gun safety protocols.

Trump may indeed feel emboldened by how his tariff threat agains Colombia regarding its refusal to take military jets carrying deportees lead to a quick climbdown.4 But his demands of Canada and Mexico are unreasonable, and also so extreme that it’s hard to see what his fallback would be.

The Trump tariffs are such an obvious lose-lose that they’ve achieved the seemingly-impossible task of reversing the terminal slide in prime minister Justin Trudeau’s reputation, as well as solidifying Canadian opposition to other forms of US economic imperialsm.

Mark Carney, an unusually Serious Economist by virtue of having been both the governor of the Bank of Canada and then the governor of the Bank of England, advocated Canada imposing dollar for dollar retaliatory tariffs:

Reader johnnyme posted a link showing that Canada was still formulating its list, as the wags said the priority would be to hit red states hardest:

The first phase of our response will include tariffs on $30 billion in goods imported from the U.S., effective February 4, 2025, when the U.S tariffs are applied. The list includes products such as orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics, and pulp and paper. A detailed list of these goods will be made available shortly.

Minister LeBlanc also announced that the government intends to impose tariffs on an additional list of imported U.S. goods worth $125 billion. A full list of these goods will be made available for a 21-day public comment period prior to implementation, and will include products such as passenger vehicles and trucks, including electric vehicles, steel and aluminum products, certain fruits and vegetables, aerospace products, beef, pork, dairy, trucks and buses, recreational vehicles, and recreational boats.

In his speech, Trudeau not only announced retaliatory tariffs, but also urged consumers to boycott US goods. That seems to be getting traction:

As for Mexico, Trump’s economic war casus belli is that Mexico needs to be more to curb fentanyl coming into the US and stop the entry of migrants. Gee, so why is Trump a crypto tout, when the use of crypto enables crime, particularly drug trafficking? Sadly, otherwise sane people I know maintain that the Mexican government is controlled by gangs, and by implication, Trump-tariff-induced regime change is warranted.

This program is so deranged, particularly in combination with the other intended Trump economic shock of radically cutting or otherwise disrupting Federal funding of all sorts of activities that one has to wonder if Trump is trying to create a US version of the neoliberal shock Russia suffered in the 1990s, which allowed mere mortals to become obscenely rich by hoovering up distressed assets.5

While this sort of pillaging may be what eventually results, this instead seems to be the result of libertarian extremists getting their way, combined with undue faith that taking linear steps will produce the desired outcomes. Long-standing readers may recall how we have often discussed the principle of obliquity. In highly complex systems, and the US economy and the global trade system qualify, the terrain can’t be mapped accurately. Trying to navigate simple paths through it results in worse outcomes than setting high level objectives and adapting as you move forward.

Musk’s cost cutting at Twitter provides an illustration. And keep in mind that Twitter is vastly less complicated than either the Federal government or the trade system. From Techdirt (hat tip Paul R):

Remember how Elon Musk destroyed Twitter by ripping apart its infrastructure without understanding it? Now imagine that same playbook applied to the federal government. It’s happening, and the stakes are exponentially higher. When reviewing Kate Conger and Ryan Mac’s book “Character Limit” last fall, I highlighted two devastating patterns in Musk’s management: his authoritarian impulse to (sometimes literally) demolish systems without understanding them, and his tendency to replace existing, nuanced solutions with far worse alternatives (even when those older systems probably did require some level of reform). Those same patterns are now threatening the federal government’s basic functions…

At Twitter, Musk’s “reform” strategy transformed a platform used by hundreds of millions for vital communication into his personal megaphone, hemorrhaging somewhere between 60-85% of its revenue in the process.

The article describes some of the clearly unqualified DOGE staffers turned loose to fiddle with dials, including a 21 year old who worked for Palantir, a 2024 high school grad, and a lawyer who had the NRA as a client.

Techdirt provides more unsavory details, such as:

Then, later today [January 31], Reuters reported that Musk’s aides have locked career civil servants entirely out of government computer systems.

Aides to Elon Musk charged with running the U.S. government human resources agency have locked career civil servants out of computer systems that contain the personal data of millions of federal employees, according to two agency officials.
[….]
The systems include a vast database called Enterprise Human Resources Integration, which contains dates of birth, Social Security numbers, appraisals, home addresses, pay grades and length of service of government workers, the officials said.

“We have no visibility into what they are doing with the computer and data systems,” one of the officials said. “That is creating great concern. There is no oversight. It creates real cybersecurity and hacking implications.”

Officials affected by the move can still log on and access functions such as email but can no longer see the massive datasets that cover every facet of the federal workforce.

Only one of the four DOGE suits sought an injunction and it evidently was not granted. Lambert will have more to say in a post later today, but calling the Trump regime a coup is no exaggeration. I hope you can position yourself to minimize the exposure.

_____

1 I have not been able to tell from media accounts the revocation of the “de minimus” exemption is limited to the countries just now being hit with new or higher tariffs, or is an across-the-board change. Matt Stoller has a very good writeup in his latest issue of his BIG newsletter and says the change is not exactly about the “de minimus” exemption but that it applies only to Mexico. Canada, and China. However, I would not bet on this being what happens in practice. We’ve repeatedly seen Trump operatives acting well beyond what his executive orders stipulated, starting with DOGE, with additional Keystone Cops level confusion about their application. From Stoller:

Trump has done something that liberals have long advocated, which is to suspend part of what’s called the “de minimis” loophole, an exemption that a person can import up to $800 into the U.S. every day duty free and largely uninspected. If you’ve ever been abroad and bought something as a tourist, you’ve had the experience of flying back to the U.S. and writing down on a form in the airplane what you bought. If it’s above $800 you have to go to a special place and pay duties, if it’s below that you don’t. That’s what de minimis was for.

Commercial importers didn’t use de minimis. Instead, they used “Formal Entry,” which, as it sounds, is far more structured to allow American customs officials to track what’s coming into the country. A commercial importer had traditionally bought in bulk, shipped those goods into the U.S. usually on a container ship or semitruck, and was required to use a licensed customs broker to manage the process. Say you were a bicycle wholesaler. You’d import a thousand bikes wholesaling at $300 from Taiwan or China. You would then list the tariff code of bicycles on your boxes, pay duties, have a licensed customs broker and a bond for liability, have your boxes potentially inspected, and then brought those boxes to a warehouse, where they’d be unloaded and sent to different retail stores for sale.

However, thanks to a 1990s era regulation allowing the consumer not the seller to be considered the importer, ecommerce vendors started sending individual packages where the value was less than $800 directly to end consumers, claiming these were “de minimis” and thus were de facto exempt from all duties, tariffs and customs requirements. So now Amazon can just send that bike to a consumer and avoid any duties and most paperwork while your local bike shop would have to pay tariffs on the bikes they stock. Today there are 1.4 billion package that come in de minimis, most from China. A lot of the four million daily de minimis packages are low-value fast-fashion online purchases. It’s effectively a completely tariff free no-inspection wild west zone of fentanyl and smuggling. This loophole is the basis of the business model of Shein, Temu, and Amazon, who have lobbied aggressively to maintain this kind of open border policy.

That said, there are two parts to the de minimis loophole, and Trump only ended one of them. The first is the tariff exemption, which is now suspended. Everyone has to pay tariffs on everything from China, Mexico and Canada. That’s particularly important for the higher end goods below the threshold, the $750 bike or auto parts, for which a tariff does matter in and of itself. But for low value goods, that $3 t-shirt from Shein, which might wholesale at 30 cents, it doesn’t really matter. In that case, Temu will have to pay 10 cents, which is virtually nothing.

The second exemption was mandating that importers go through the “Formal Entry” customs procedure so that CBP actually can tell what is in each box coming into the U.S. These orders didn’t touch that. That’s not as important for high value products, but this is the killer for the Shien and Temu-style products. These importers would have to radically upend their supply chains to comply, if that customs procedure were changed to require licensed brokers and bonding. Unfortunately, it wasn’t. And that means the flow of low-value de minimis packages will likely come in, mostly unabated. In fact, it means that the big guys, Temu, Shein, and Amazon, who have special customs relationships allowing them to easily pay the now-minimal tariffs, will now have an advantage over smaller importers who don’t.

2From the Guardian:

Last month, on just his second day in office when he announced an investigation into US-China trade, Trump said: “Other countries are big abusers also, you know it’s not just China,” and added that he was also looking at trade with the EU. “We have a $350bn deficit with the European Union. They treat us very, very badly, so they’re going to be in for tariffs,” he said.

Trump doubled down, as the BBC confirmed: Trump says EU tariffs will happen and UK is ‘out of line’ but deal ‘can be worked out’

3 Given how official stats are collected, there are many ways to allocate tariff costs across industries and establishments.

4 Some readers from Colombia claimed that Colombia won the encounter by getting the Administration to agree not to have soldiers involved in the transit ex apparently flying the military aircraft. I did not see any agreement not to shackle or cuff them. Regardless, based on some sampling, the press outside the Collective West (presumably ex Colombia) also scored the encounter as a Trump victory. The poor state of reporting means I have not been able to find easily as to whether the Trump demand included unlimited deportations with no/little prior warning, since press reports earlier had stated that most (all?) countries had had to agree to accept their return.

5 This is no exaggeration. I personally know a then dual Russian-American citizen who went to Russia with $180,000 and is now woth over $25 billion.

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