Hot Take: The dumbest trade war in history

Trump's tariffs on Canada and Mexico are a case of self-flagellation—hurting consumers, exporters, and US credibility with no real gains.

Hot Take: The dumbest trade war in history
US trade policy for the past eight years. Image by Brian Riedl/X.

Well, it happened. Earlier today, US President Trump followed through on his threat to whack Canada and Mexico with 25% tariffs on all goods, with an additional 10% tariff on China for good measure (China already has a 25% tariff on many of its goods left over from Trump 1.0).

I shamelessly stole the title of this post from the WSJ, which had this to say:

"This reminds us of the old Bernard Lewis joke that it's risky to be America's enemy but it can be fatal to be its friend."

It's worth noting that despite Trump having threatened this move for several weeks, markets only started to price it in over the weekend. As recently as Thursday, the odds of this taking place before March were below 30%:

Wall Street was just as surprised, with S&P500 futures dropping more than 1%:

Basically, people thought Trump was bluffing to win the election. Surely, surely, he wouldn't be stupid enough to follow through with his threats and actually whack substantial tariffs on his country's two largest trading partners, which also happen to be close allies.

But it turns out that yes, he is in fact stupid enough.

Make it make sense

Henry George once wrote:

"What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war."

Make no mistake about it: these tariffs will hurt the US economy. They're big – equivalent to an 11% across-the-board tariff, up from the current 3% – and will result in:

  • consumers in all countries paying higher prices for goods;
  • exporters suffering from exchange rate appreciation, the inevitable retaliation from politicians in Canada and Mexico, along with higher input prices; and
  • importers losing because foreign goods are now more costly to acquire.

This is all basic economics, a class Trump must have slept through during his time at the University of Pennsylvania's Wharton School:

These tariffs will also do nothing to achieve their stated aim, which according to Trump is to stop "illegal aliens and drugs" coming into the US (likely a thinly veiled guise for his real goals, as a US President cannot implement tariffs without a "national security" reason).

But even if Trump's endgame is to balance trade with these countries (for whatever reason), tariffs don't do that: both imports and exports will contract due to the tariffs themselves (imports) and exchange rate appreciation or retaliation (exports).

If Trump actually wanted to shrink the US trade deficit, he would first need to cut the large and growing budget deficit, which encourages foreign capital inflows and a strong US dollar that are offset by a trade deficit (the balance of payments must balance!).

But perhaps Trump's true intention is to bring manufacturing back to America. Unfortunately for him, they won't do that either because tariffs "act more like a tax on domestic manufacturers who use these [tariffed] imports, raising their costs instead of protecting them from foreign competition".

The fact is that around half of US trade is for inputs used to produce final goods, and many of those inputs cross the Canadian and Mexican borders multiple times before final assembly: