by Jim Rickards, Daily Reckoning:
It’s game on for the trade wars.
After months of threatening tariffs on U.S. trading partners during his 2024 presidential campaign, Trump has now taken definitive action on that front. On Saturday, February 1, Trump announced that the U.S. was imposing 25% tariffs on all goods imported to the U.S. from Mexico and Canada (with the exception of Canadian energy, which was tariffed at 10%) and additional 10% tariffs on all goods imported from China.
These new Chinese tariffs were on top of tariffs Trump imposed on China in 2018, many of which were left in place during the Biden administration. All of these new tariffs were to take effect on Monday, February 3rd.
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Trade Wars Are Heating Up
Canada announced they will retaliate against Trump’s tariffs with 25% on a list of U.S. imports and warned Americans that Trump’s actions would have real consequences for them. Mexico has said it will also impose retaliatory tariffs, without mentioning any rate or products.
Meanwhile, China struck back at the United States by announcing tariffs on select American goods, escalating the trade war. Some U.S. goods imported into China will be subject to tariffs of up to 15%, as they rolled out a series of retaliatory measures to counteract Trump’s planned tariffs.
The new trade wars have now gone global. In addition to the Mexican, Canadian and Chinese tariffs, Trump announced that EU tariffs are coming soon. Trump tentatively indicated that the EU tariffs would be 10% across the board.
Even though there have been concession moves by both Canada and Mexico recently, Trump has only delayed his tariff plans in the negotiations.
But It’s clear that a full-scale global trade war is now underway. And it could be devastating for investors who don’t know how to maneuver through the landmines.
Neighborhood Wars
Canada ($419 billion) and Mexico ($475 billion) account for almost 30% of all goods imported by the United States. Canada, Mexico and China are the three largest trading partners of the U.S.
Obviously, Canada and Mexico are our closest neighbors, and each shares a long border with the U.S. The new trade wars will have many facets, but solving problems with regard to Canada and Mexico will be a big part of the global puzzle and establish benchmarks by which other countries will be judged by the U.S.
The extent of Canadian and Mexican trade with the United States is difficult to overstate. Twenty-three of the fifty states rank Canada as their number one trading partner measured by imports. That includes the entire northern tier of U.S. states from Washington to Maine (with the exceptions of Idaho and Michigan) and most of the Midwest.
Ten of the fifty states rank Mexico as their number one trading partner measured by imports. That includes the entire southern tier of U.S. states (with the exceptions of California and Florida), plus the states of Missouri, Kentucky and Michigan. From automobiles to avocados, Canadian and Mexican imports are everywhere.
Trump cited three reasons for imposing tariffs on Mexico and Canada: illegal immigration, fentanyl and unfair trade practices. The issues of illegal immigration and fentanyl are closely linked because they both involve securing the border.
A bigger issue lurking behind the U.S.-Mexico negotiations is the extent to which Chinese companies have taken over Mexican companies or built their own factories in Mexico to do an end-run around direct tariffs on China.
The Chinese are putting automobile assembly plants in Mexico and exporting the cars to the U.S. free of tariffs under the U.S.-Mexico-Canada Trade Agreement (USMCA, the successor treaty to NAFTA). It may be the case that U.S. auto companies (Ford, GM) will be able to continue bringing in cars to the U.S. without duties while the Chinese-owned companies in Mexico get whacked.
That leaves open the issue of European car makers with plants in Mexico. I spoke to a well-informed source at Audi recently. They’re frantic. They just built a multi-billion-dollar plant in Mexico to do final assembly on the Q5 SUV (their most popular model). They expect that new Mexican tariffs will price it out of the market (compared to Toyotas and Nissans that are built in the USA).
Volkswagen, which owns Audi, may be in financial distress as a result of Audi’s mistake. It was clearly a major blunder on Volkswagen’s part not to locate their Audi factory in Tennessee or South Carolina as other foreign car manufacturers have.
The trade situation with Canada is more problematic.
Even with the one-month delay in imposing tariffs on Canada, the substantive policy issues remain. Trudeau is not in a strong position to negotiate anything because he has already agreed to step down as party leader and Prime Minister. The fight to replace him as party leader is being led by former Deputy Prime Minister Chrystia Freeland, a trade-hawk and neo-fascist sympathizer.
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