Not ‘beautiful’: Why Trump’s tariff strategy could undermine North American trade

When it comes to trade policy, the second Trump presidency is promising to be even more contentious as the first. President-elect Trump did not hide his cards during the campaign when he boasted about imposing steep tariffs against China, and then upped his hand by proposing a blanket tariff for all U.S. imports.

In fact, two months ago, Trump referred to tariffs as “the most beautiful word.” Some argue that the president will be using these proposed tariffs as bargaining chips, but there comes a point that U.S. trading partners, friendly or unfriendly, might start looking at alternative, more reliable partners in a world where supply chains play a critical role.

The latest trade move by the president was his threat to raise tariffs to 25 percent for Canada and Mexico, to force them to help control illegal immigration and the movement of drugs across the U.S. border. Both countries have already responded: While Canada’s response was more muted, Mexico has threatened to impose retaliatory tariffs.

These developments are more concerning, especially with the approaching review timeline for the USMCA in 2026. Renegotiation of the original trade pact, NAFTA, that took almost three years from the start to finish, was hard to watch given the significant economic relationship of the three countries. Canada and Mexico are continuously among the top two trading partners for the U.S. and with the fragile China-U.S. relationships their importance is increasing.

Both President Trump’s and President Biden’s actions against China created reciprocal action by China. Most recently, China declared an export ban for critical minerals, key inputs for high-tech industries, responding to additional U.S. export controls on its chip industry. U.S. actions over the years, especially against the Chinese chip industry, is increasing the motivation for China to become self-sufficient in the semi-conductor industry and there have been a number of press reports on significant developments in the Chinese industry, despite the U.S. actions.  

The recent ban on exports of critical minerals by China underlines the importance of having alternatives, especially if the U.S. intends to continue its tariff policy on China, and at least one of our USMCA partners are already addressing the issue.

For example, after the passage of the CHIPS and Science Act in the U.S., Canada launched a $1.5 billion Canadian Critical Minerals Infrastructure Fund and they have been supporting their 2022 Critical Minerals Strategy with a budget of almost $4 billion. The joint effort that was established in 2020 to support $95.6 billion in bilateral trade is another building block in the relationship that has been flourishing under the trade pact.

Another campaign promise by Trump was to develop oil and gas production in the U.S. and when it comes to both energy imports and exports, both Canada and Mexico are key partners. For example, in 2023, Mexico was the largest export market for U.S. petroleum products. As a key trading partner, the country will be integral to the success of Trump’s energy agenda.

And then there is the auto industry. President Trump and his then-chief trade negotiator, Ambassador Robert Lighthizer, worked very hard on the new auto provisions during the renegotiation of NAFTA and according to a recent report, it looks like the hard work paid off: “Automakers and parts suppliers have invested billions of dollars in new production, and the U.S. International Trade Commission (USITC) estimated the automotive [rules of origin requirements] have been positive for U.S. employment, wages, capital expenditures, production, and profits.”

These are only a few examples highlighting the importance of the two trading partners for the U.S. economy. If the president’s goal is to increase the economic growth, employment and investment for the country and to lower the cost of living for the U.S. citizens, keeping friends like Canada and Mexico on our side, rather than antagonizing them, might be a good move in an increasingly uncertain world.