Trump Threatens 25% Tariff On Mexico & Canada, Extra 10% On China – But It’s About Something Else, Not Trade War

Financetwitter:

Trump Threatens 25% Tariff On Mexico & Canada, Extra 10% On China – But It’s About Something Else, Not Trade War


November 29th, 2024 by financetwitter



Fresh from being elected as the 47th U.S. President, Donald Trump has moved at lightning speed in forming his team. His new Cabinet features younger faces and fresh ideas, with heavy representation from the business world. Crucially, the Trump 2.0 shows less influence of the GOP establishment than his first Cabinet. And despite accusation that he was a misogynist, 8 out of 25 are female in his new Cabinet.

Stunningly, the Trump-Vance transition has been able to assemble all Cabinet-level positions within about 3 weeks of Election Day. In comparison, Trump’s first victory to the White House in 2016 took months for the first Cabinet to be formed. Equally impressive was the speed at announcing trade tariffs, which Trump unveiled some four days ago.

Trump has announced that he will sign an executive order on January 20, 2025, his first day in office, to slap a 25% tariff on all products coming into the United States from Mexico and Canada, and additional 10% tariff on China. Was he really that desperate to start a new round of trade war with not only Beijing, but also neighbouring Canada and Mexico? Turns out, it’s not about trade war at all.


The new tariffs were weapons to force all the three countries to crack down on two problems – migration and illicit drugs. Trump said the 25% tariffs would remain in place until Mexico and Canada clamp down on drugs, particularly fentanyl, and people crossing the border illegally. The additional 10% tariff on China was due to Beijing’s failure to curb the number of drugs entering the U.S.

Even during Trump’s first term, China had been accused as a major producer of chemicals that are acquired by drug cartels, including in Mexico, to manufacture fentanyl, a highly potent synthetic opioid. U.S. authorities said Chinese money launderers have become key players in the international drug trade. But the problem remains unsolved till today.

Trump said China was “killing us” and accused Biden of allowing it to happen – referring to the flow of illegal fentanyl drug into the U.S. which was responsible for 200 deaths every day. Over a quarter of a million Americans have died from a fentanyl overdose from 2018 to 2022. In the past decade, more than 400,000 Americans have died of synthetic opioid overdoses.


The Biden administration has been negotiating with Beijing to crack down on the drug. But China appeared to be dragging its foot, despite President Xi Jinping’s commitment to help curb the production of the illicit fentanyl. Liu Pengyu, a Chinese embassy spokesperson, said – “The Chinese side has notified the US side of the progress made in US-related law enforcement operations against narcotics.”

The burning question is what will Trump do next if China, or Canada and Mexico for that matter, refuses to do anything and let the tariffs do the damage? A tariff is essentially a tax on imports, or foreign goods brought into the United States. While Trump has said foreign countries pay for tariffs in an attempt to hoodwink gullible Americans, tariffs are actually paid by American companies that import goods from abroad.

For example, if an American car manufacturer is importing a part from Mexico, it will have to pay a tariff on the part once it arrives in the country. Whether the company absorbs the tariff or passes down the extra cost to consumers is entirely up to the company. Not only Trump was wrong to claim the tax only punishes manufacturers abroad, but he also hides the fact that it hurt U.S. companies and consumers.


Let’s say an American importer buys T-shirts from overseas for US$12 and sells them for US$20 each. If a new tariff of 50% – US$6 per T-shirt in this case – were imposed, the importer could raise prices for consumers by US$6, therefore the new price will become US$26. But he could lose sales in the process. Alternatively, it could absorb the tax, reducing its profit margin from US$8 to US$2 per T-shirt.

Of course, it could demand – even threaten – its overseas supplier to cut prices by US$6, which the supplier most likely will reject as it would mean making losses. So, regardless whether the U.S. importers absorb the tariffs introduced by its own president, or increase the price accordingly, it’s the American companies and consumers who will eventually suffer.

A 2019 study estimated that by the end of 2018, “import tariffs were costing U.S. consumers and the firms that import foreign goods an additional US$3 billion per month in added tax costs.” Under both the Trump and Biden administrations, according to the Tax Foundation, trade war tariffs have generated “more than US$233 billion of higher taxes collected for the U.S. government from U.S. consumers.”


During Trump’s first administration, his tariffs – more limited than his current proposals – generated US$80 billion in revenue alone. If Trump proceeds with a 10% tariff on all imports, as he proposed during his campaign, the federal government would reap US$2 trillion from 2025 through 2034. However, that revenue would largely be paid by U.S. consumers and businesses.

According to Goldman Sachs, a 25% tariff on Canada and Mexico, along with a 10% tax on Chinese imports, would generate about US$300 billion in tariff revenue per year. Overall, 43% of U.S. imports come from Mexico (15.4%), Canada (13.6%), and China (13.9%). In other words, companies like Walmart would be faced with the decision of whether to swallow the higher costs of imports, or passing those on to consumers.

Hence, Donald Trump was absolutely right to brag that tariffs can raise revenue for the U.S. government. What he didn’t tell his 74 million supporters during his first term was that those truckloads of revenue came from American consumers and companies themselves. U.S. companies imported over US$1.2 trillion from Canada, Mexico and China in 2023. The three countries are the U.S.’ largest trade partners.


Canada is a major exporter of crude oil and other gas products to the U.S., whilst Mexico has become a major car and auto parts exporter in recent years. Meanwhile, China is a major exporter of electronics, like phones and laptops. Because the U.S. imports more goods than its exports, it has always recorded trade deficits, which Trump thinks is bad even though some economists think otherwise.

It’s not hard to understand why many economists and Wall Street analysts are worried about Trump’s new tariffs and retaliatory measures by U.S. trade partners. It could slow economic growth, spark inflation and trigger a trade war. Trump believes that imposing tariffs on trading partners will help protect U.S. businesses at a time when domestic manufacturing jobs have fallen far from their peak in 1979.

Trump also believes that broad-based tariffs will convince some foreign manufacturers to open plants in the U.S. as a way to avoid the import duties. In truth, however, business owners, have shifted or relocated manufacturing from China to other safer nations like Vietnam and Cambodia. That’s because the cost of raw material, labour, taxes, shipping and regulatory policies are higher in the U.S.


Trump’s tariffs could cost the typical U.S. family an additional US$2,600 a year. Still, it’s unclear whether drug smuggling or immigration issues could be stopped even if Canada, Mexico and China increase enforcement. Mexican President Claudia Sheinbaum has warned that Mexico could retaliate with tariffs of its own and lectured Trump that illegal drugs is a problem of U.S. public health and consumption.

But the fact that president-elect Trump picked the hedge fund manager Scott Bessent to be his treasury secretary – a move many Wall Street executives believe signalled a willingness to moderate his approach to tariffs – means he may not be as reckless as previously in starting a trade war with everyone. His latest tariff is his usual classic move – “threaten, and then negotiate”.

The problem with Trump’s tactic is that other countries had played the same game. After Trump imposed tariffs on Chinese imports, China puts tariffs on American imports, including soybeans and corn. The move ultimately hurt American farmers, who relied on business with China. Trump, without the approval of Congress, ended up bailing out farmers who saw at least US$10 billion in export revenue drop after the tariffs.