The End of North America

Trump pulls the trigger on tariffs

I’ve been saying for a while that markets were far too complacent about Trump’s threat to impose tariffs on Canada and Mexico, believing that he wouldn’t follow through because it’s such a stupid, self-destructive idea. As I wrote on Jan. 22,

[S]o far markets have shrugged Trump’s tariff threat off, apparently in the belief that he won’t follow through. But why not? Economists would, if he asked, tell him that high tariffs on neighboring nations closely integrated with the United States will do major damage; businesspeople would say the same thing. But if Trump wants your opinion, he’ll tell you what he wants it to be.

I believe that the only thing that might dissuade him from destructive policies would be a severely adverse market reaction — which means that the lack of such a reaction, based on the belief that he won’t really do it, greatly increases the probability that he really will.

And he really did. The New York Times reports,

President Trump plans to move forward with imposing stiff tariffs on Mexico, Canada and China on Saturday, in an attempt to further pressure America’s largest trading partners to accept deportees and stop the flow of migrants and drugs into the country.

In a news briefing on Friday, the White House press secretary, Karoline Leavitt, said the president would put in place a 25 percent tariff on goods from Mexico, a 25 percent tariff on goods from Canada and a 10 percent tariff on goods from China.

Ms. Leavitt said the president had chosen to impose tariffs because the three countries “have all enabled illegal drugs to pour into America.”

“The amount of fentanyl that has been seized at the southern border in the last few years alone has the potential to kill tens of millions of Americans,” she said. “And so the president is intent on doing this.”

The tariffs are likely to initiate the kind of disruptive trade wars seen in Mr. Trump’s first term, but at a much larger scale.

I think you have to see “fentanyl” in this context as the equivalent of “weapons of mass destruction in the runup to the invasion of Iraq. It’s not the real reason; Canada isn’t even a major source of fentanyl. It’s just a plausible-sounding reason for a president to do what he wanted to do for other reasons — George W. Bush wanted a splendid little war, Donald Trump just wants to impose tariffs and assert dominance.

Also, although I’m not sure such things matter anymore, what’s the legal basis for these tariffs? U.S. trade law gives the president huge discretion to impose tariffs, but only for a specific set of reasons: economic injury from import surges (Section 201), national security (Section 232), unfair foreign competition (Section 301), dumping — sales below costs. Drug smuggling, especially imaginary drug smuggling, isn’t on the list.

The president can impose tariffs much more broadly if he declares a national economic emergency. But has he done that? Does 2.6 percent inflation and 4.1 percent unemployment sound like an economic emergency to you? And even if Trump gets around to declaring an economic emergency, what does fentanyl have to do with it?

As far as I can tell, there’s a real possibility that Trump’s new tariffs will face a court challenge, and that he will lose. I’m not an expert on trade law, but I do know a bit, and this looks flatly illegal to me.

But even if these tariffs are blocked, or Trump finds some way to declare victory and call them off, the damage will be immense.

As I wrote the other day, in the three decades since NAFTA went into effect, North American manufacturing has evolved into a highly integrated system whose products — autos in particular, but manufactured goods more broadly — typically contain components from all three members of the pact, which may be shipped across the borders multiple times. Manufacturers developed this system not just because tariffs were low or zero, but because they thought they had a guarantee that tariffs would stay low.

One way of saying this is that until just the other day there was really no such thing as U.S. manufacturing, Canadian manufacturing or Mexican manufacturing, just North American manufacturing — a highly efficient, mutually beneficial system that sprawled across the three nations’ borders.

But now we have a U.S. president saying that a duly negotiated and signed trade pact isn’t worth the paper it was printed on — that he can impose high tariffs on the other signatories whenever he feels like it. And even if the tariffs go away, the private sector will know that they can always come back; the credibility of this trade agreement, or any future trade agreement, will be lost. So North American manufacturing will disintegrate — that is, dis-integrate — reverting to inefficient, fragmented national industries.

Hence my title, “The end of North America.”

And to think that many people imagined that Trump would be good for business.