We have all grown up in an era of constantly expanding global trade since WW2. But that period has begun to disappear.
On Saturday, the US confirmed it plans to impose 25% tariffs on imports from Canada (10% on energy imports) and Mexico, and 10% on China, from Tuesday. As the New York Times notes:
“Canada, Mexico and China are America’s three largest trading partners, supplying the United States with cars, medicine, shoes, timber, electronics, steel and many other products.
Together, they account for more than a third of the goods and services imported to or bought from the United States, supporting tens of millions of American jobs.”
And President Trump warned on Friday that this is only the start. In the next two weeks, he plans to impose tariffs on computer chips, pharmaceuticals, steel, aluminium, copper, oil and gas imports.
There will also be tariffs on the European Union.
PRESIDENT TRUMP RISKS FIGHTING ON TOO MANY FRONTS AT ONCE..
Largest economies in the world by GDP (nominal) in 2024
The US is the world’s largest economy, as the charts based on IMF data confirm. But it is only 26% of the total:
- The three main BRIC countries (Brazil, India, China) represent 23% ($26tn)
- The other G6 nations are 18% ($21tn), and are accustomed to working together
It is relatively easy for the US to use its muscle to take on a small country like Colombia, whose GDP is just $0.4bn.
But a trade war with the world’s other major economies, all at once, is a far bigger challenge.
Canada has already announced a well-prepared and targeted response. Mexico and China are expected to follow. And no doubt, both sides will then escalate further.
…AND WITH A WIDE RANGE OF VERY DIFFERENT OBJECTIVES
Automakers most exposed to Canada, Mexico tariffs
About 22% of new cars sold in the U.S. in 2024 were built in Canada or Mexico
Another key issue is that wars need very clear objectives, as with WW2 and the Cold War. But today, the President has a very wide range of objectives as Reuters reports:
- He wants to stop the flow of fentanyl and precursor chemicals from China via Mexico and Canada
- He wants to reduce the US trade deficit by targeting its top three trading partners
- He also wants to reduce illegal immigration from Mexico
- And he wants to use the revenue from tariffs to fund the continuation of tax cuts at year-end
A further issue, as the Wall Street Journal chart shows, is that 22% of all cars sold in the US last year were built in Canada or Mexico:
- Autos is the US’ largest manufacturing industry, with 9.7 million jobs depending on it
- It cannot simply change its production lines and suppliers overnight
- Even cars built in the US depend on imported parts arriving within very tight schedules
- The border checks needed to police the tariffs risk completely disrupting production lines
WARS ARE EASY TO START, AND VERY DIFFICULT TO END
Trade wars are very easy to start. But wars then take on a life of their own as the boxer, Mike Tyson, has explained: “Everybody has a plan until they get punched in the face.”
Canada and Mexico are major countries, and they have been preparing for a trade war for some months. They have also been part of the North American free trade area since it began in 1994 – first as NAFTA, and then in Trump’s own UMCA since 2020.
As the Council on Foreign Relations (CFR) reports:
Certain sectors of the US economy would be hit particularly hard, including the automotive, energy and food sectors:
- Canada and Mexico supply more than 70% of crude oil imports to US refineries
- The US imports nearly half its auto parts from its northern and southern neighbours
- Mexico supplies >60% of US vegetable imports and nearly half of all fruit and nut imports
- US exports to Mexico are 5% of Texas’ GDP
As the CFR warns: “U.S. fuel exporters would likely take the biggest hit alongside automakers and other advanced manufacturers, including pharmaceutical producers.”
And the problems will multiply when the tariffs escalate, and start to involve Europe and other major trade partners.
COMPANIES NEED TO DEVELOP MORE LOCAL-FOR-LOCAL SUPPLY CHAINS
US trade policy has been based on open trade since the end of WW2, as President Reagan described in his Thanksgiving Day address in 1988:
“Our peaceful trading partners are not our enemies; they are our allies. We should beware of the demagogues who are ready to declare a trade war against our friends—weakening our economy, our national security, and the entire free world—all while cynically waving the American flag.”
Our major 2016 Study, “Demand – the New Direction for Profit” warned that the era of globalisation was over. Its theme was that companies needed to refocus away from supply-driven strategies, and instead become demand-led.
We can all hope that today’s new trade wars are quickly resolved. But hope is not a strategy.