Reruns

Commentary by William Alan Reinsch

Published December 2, 2024

I was planning to write on a different subject this week but have detoured to deal with Trump's announcement about imposing tariffs on Canada, Mexico, and China for their failure to address our fentanyl and migrant problems. I should have expected this, as it was common during the president-elect's first term-make a headline-grabbing outrageous demand, creating panic in the business community and a short-lived media frenzy which then dissipates-until the next time. Meanwhile, those of us in the trenches on these issues have to put everything else aside to deal with his latest rant. These endless distractions, designed to focus attention on himself, take over the media for a day or two and force others to deal with them at the expense of their usual work. This is no way to run a government, but it appears we will see it again for four more years.

As for the announced tariffs, they follow the pattern described above-outrageous demands accompanied by big threats that are intended to lead to a negotiation, at which some demands will be met, and the president can claim victory and take credit. We've seen this movie before, but this time, the targeted countries will be better prepared to deal with it. This is exactly the strategy he employed in 2017 with his threats to pull out of the North American Free Trade Agreement. It worked that time and produced the United States-Mexico-Canada Agreement (USMCA, fondly known on the Trade Guys podcast as "U-SMACKA"), one of Trump's few actual trade successes. One reason why Canada and Mexico were his first choices of victims this time was that the strategy worked the last time, so why not try it again? (China is a separate case but the one where tariffs are most likely to be imposed. It is legally simpler-determine that China has not met the terms of its Phase 1 commitments and then use Section 307 of the Trade Act of 1974 to retaliate-and politically easier than going after our neighbors.)

At this point, it is too soon to say whether it will work. Canada appears to be trying to accommodate him, but Mexico seems more inclined to stand up to the bullying. The new president, Claudia Sheinbaum, has suggested U.S. tariffs will be met with Mexican tariffs in retaliation. The most likely outcome is that he will announce the tariffs on January 20, then immediately suspend them-with a deadline-to allow for a negotiation. He could do that under the International Emergency Economic Powers Act. He would be sued-there is no shortage of people that would be harmed by the tariffs-but litigation would take several years to work its way through the legal system, and it is unlikely the plaintiffs could find a judge that would grant an injunction preventing the tariffs from going into effect. Alternatively, he could initiate a process that would start an investigation and buy him time for a negotiation before he had to make a decision. Either Section 232 or Section 301 of our trade laws could enable that.

A third alternative, relevant if Mexico pushes back, is to make a deal with Canada and impose the tariffs only on Mexico-a divide-and-conquer strategy that would prevent the other two from ganging up on him. The irony of all these alternatives is that they only speed up what was going to happen anyway. The USMCA requires a review every six years, and the first one is set for 2026. While it is technically a review, it will, in fact, be a renegotiation, as all three parties have complaints. Trump's threats last week will simply move up the timetable. It also means posturing by Canada or Mexico at this point is useless, as all three parties are required by the agreement to meet in 2026.

That is the irony. The tragedy is the economic disruption the threat will cause and the disaster that will ensue if he actually implements the tariffs. The threat alone roils markets, creates panic buying, and forces companies to look for alternative sources. If implemented, the tariffs will produce immediate price increases on a broad range of products. Most affected will be automobiles, where thousands of vehicles, parts, and components cross both borders daily. When President Sheinbaum discussed the tariffs in her daily press conference, she pointed out that three of Mexico's biggest exporters are Ford, General Motors, and Stellantis. It is also ironic that the man who promised to lower energy costs is threatening to add 25 percent to the cost of Canadian and Mexican oil and gas. Over the next few weeks, there will be many analyses of how much this is going to cost, so stay tuned-and remember that no matter what Trump says, the foreigners do not pay the tariffs. Importers do, and they pass most of it on to consumers.

If you take one thing away from this column, it should be that we are watching reruns. He has played this game before with mixed results. USMCA was a success. China was not. Others were in between. But every time, win or lose, it creates economic chaos.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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