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Kathmandu. The global economy is bracing for the impact with President Donald Trump less than 24 hours away from a deadline to impose sweeping tariffs on Canada, Mexico and China, the United States’ three largest trading partners.
Shortly after taking office this month, Trump threatened to impose a 25 percent tariff on neighboring Canada and Mexico on February 1 if they did not crack down on illegal immigrants crossing the U.S. border and the flow of deadly fentanyl. He also said he was considering imposing an additional 10 percent tariff on Chinese goods starting Saturday because of fentanyl. On Thursday, he reiterated his commitment to impose tariffs on all three countries. Later that day, he threatened to impose a 100 percent tariff if the BRICS nations created a currency rivaling the U.S. dollar.
The BRICS nations are Brazil, Russia, India, China and South Africa. Fentanyl, which is many times more potent than heroin, is responsible for tens of thousands of overdose deaths a year. Beijing has previously denied any involvement in the deadly trade. Canada has countered that less than 1 percent of undocumented immigrants and fentanyl entering the United States come through the northern border. Analysts at JPMorgan believe the tariff threat is a “bargaining tool” to help renegotiate a trade deal between the United States, Mexico and Canada.
“However, potentially dismantling a decades-old free trade area would be a major setback,” JPMorgan said in a recent note. One lesson from Trump’s first term, according to JPMorgan, was that policy changes could be announced or threatened on short notice. American businesses pay tariffs to the government when they buy from abroad, and the economic burden could fall on importers, foreign suppliers or consumers.
Recession risk – Canada and Mexico face the highest U.S. tariffs of less than 25 percent and proportional retaliation from both countries, said Wendong Zhang, an assistant professor at Cornell University. “Canada and Mexico would lose 3.6 percent and 2 percent of real GDP (gross domestic product), respectively, while the United States would lose 0.3 percent of real GDP,” he said. Tony Stillo of Oxford Economics said the massive US tariffs and a similar response from Ottawa could push Canada into recession this year, and the United States could also risk a mild recession.
Mexico could face a similar situation, said Tim Hunter of Oxford Economics. Trump is expected to decide on Thursday whether to include crude oil imports in the tariffs imposed on Canada and Mexico, but it was unclear whether there could be an exception. Canada and Mexico supply more than 70 percent of US crude imports. About 60 percent of US imports come from Canada alone, according to a report by the Congressional Research Service.
“There are no easy alternatives in the US for the heavy oil that Canada exports and refines in the US,” Stillo said. According to the Peterson Institute for International Economics (PIIE), imports of U.S. goods from both countries are largely duty-free or at very low rates on average. The tariff hikes would hit both industrial buyers and consumers, affecting everything from machinery to fruit, according to a report by the PIIE on Thursday.
This week, Canadian officials said Ottawa would provide pandemic-level financial support to workers and businesses if the U.S. tariffs were implemented. Prime Minister Justin Trudeau said on Wednesday that Ottawa was working to block the tariffs and was prepared to respond forcefully. Mexican President Claudia Senbaum said she was confident her country could avoid the tariffs. Trump’s Commerce Secretary nominee Howard Lutnick said Wednesday that if Canada and Mexico act on immigration and fentanyl, there will be “no tariffs.”
Big Deal
Trump is preparing to impose new tariffs on Chinese goods. He said on Thursday that he was considering it. “The president has said that he is still seriously considering it for February 1st,” White House spokeswoman Carolyn Levitt told reporters this week. Beijing has vowed to defend its “national interests,” and a foreign ministry spokeswoman has previously warned that “there are no winners in a trade war.”
Trump raised the idea of imposing tariffs of 60 percent or more on Chinese imports during the election campaign. Isaac Boltansky of financial services firm BTIG expects to see “gradual tariff increases” on Chinese goods, with a smaller increase likely for consumer goods. “Our understanding is that Trump will oscillate between benefits and threats with China, with the ultimate goal of making some kind of big deal before the end of his term,” he said in a recent commentary.
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