Trump's Blockade of America

Trump's Tariffs on Mexico, Canada, & China Are the Single-Largest Trade Restriction in Modern US History. That Comes With Massive Economic Costs

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What was once unthinkable is now reality. At 12:01 AM this morning, Donald Trump imposed the largest tariffs in modern US history—a 25% tariff on all Mexican imports, a 10% tariff on Canadian energy products, a 25% tariff on all other Canadian goods, and a doubling of the 10% tariffs on China imposed 30 days ago. The costs of these actions are enormous, covering $1.3T in US imports or roughly 42% of all goods brought into the United States. If households and companies tried simply to import the same goods from the same countries as last year, they would now be forced to pay an 11.5% effective tariff or more than $370B in total. Sustained, any one of these actions would exceed the total impact of Trump’s entire first-term trade wars, but combined they represent the single-largest tariff hike since the infamous Smoot-Hawley Act of nearly a century ago.

For as long as they last, these tariffs will drive up US prices for key raw materials like gasoline, fertilizers, steel, aluminum, wood, plastic, and more. Groceries, especially fresh fruits and vegetables from Mexico, will become harder to find. Manufacturing industries reliant on complex integrated North American supply chains—vehicles, computers, chemicals, airplanes, and more—could grind to a halt if those links are forcibly severed. Costs could spike for phones, laptops, and appliances where production is particularly concentrated in China and Mexico.

Exporters will be hurt by increased costs for raw materials, currency appreciation, and upcoming retaliatory tariffs—all of which will cut into US economic activity. In fact, the Canadian government has already retaliated, immediately hitting $21B in US exports, and the Chinese government has scheduled tariffs on $22B in US exports for early next week. Even more retaliation is coming—Mexico is prepping to unveil its response package, Canada is threatening another $86B in tariffs, and provincial Canadian leaders are promising their own reprisals. American export-oriented farmers, energy producers, and automakers are already in the crosshairs.

Fear of these tariffs was already having profound effects on consumer sentiment and business behavior, mostly by inducing panic-buying and hoarding throughout the previous few months. Preliminary data for January shows the trade deficit jumping by more than 25% as Americans rushed to buy foreign-made goods before Trump took office. That trend likely accelerated after the early February tariff scare, continuing to undermine US growth, consumer confidence, and inflation expectations.

Today’s tariffs, especially the ones on Canada and Mexico, are a self-inflicted wound with no good reasoning behind them. The legal justification that this is about fentanyl and undocumented immigration makes no sense given Trump did not even try negotiating with Canadian or Mexican authorities for more “concessions” before imposing tariffs. The lack of exclusions for any goods—even energy, raw minerals, basic foodstuffs, etc—and the public-facing posture of “maximum uncertainty” makes the tariffs counterproductive as industrial policy. Finally, from a geopolitical perspective, the decision to put brutal tariffs on Canada and Mexico only serves to breed animosity and push once-close allies away.

With the imposition of these tariffs, it is as though Trump has self-imposed what many foreign adversaries have only dreamed of: a partial blockade of the United States of America. This is the single-largest obstruction of US trade in post-WWII history, perhaps only behind the initial shock of COVID. As long as these tariffs remain in place, they will drive up prices, drag down US growth, and continually risk pushing the smaller Canadian or Mexican economies into recessions.

Even if tariffs are quickly rescinded, imposing them will have only undermined faith in future negotiations—after all, if Trump is so easily willing to break the USMCA trade deal he personally signed, why would you sign more trade deals with him? Decades of mutual exchange and market integration throughout North America were unilaterally reversed in one fell swoop this morning—that damage to trust is enormous and difficult to repair.

A Deeper Breakdown of Trump’s New Tariffs

Trump’s universal tariffs on America’s 3 largest trading partners cover such a breadth of goods that virtually every industry will be affected, from pharmaceuticals to textiles to aerospace. Yet the hardest-hit major products are concentrated in a few key sectors—vehicles, electronics, and energy. Delivery and pickup trucks, the vast majority of which are come from Mexico, are among the most impacted—as are the seats, parts, and other components built throughout North America to serve the continent’s sprawling auto supply chain. Electronics (like game consoles, TVs, and computers) are also hit hard by this trade war since they’re mostly manufactured in China and to a lesser extent Mexico. Finally, there’s the large amount of US oil and gas imports that mostly originate from Canada. Key pipelines powering American refineries, power plants, businesses, and households may have been spared the full 25% tariffs, but a 10% price hike is still significant.

Indeed, Midwestern US refineries source the vast majority of their crude oil from Canada, and have vanishingly little ability to replace it given the pipeline networks and how much they’ve adapted to specifically servicing Canadian crude. Midwestern states are thus likely to see noticeable increases in gasoline prices going forward now that the 10% tariff has officially taken hold. That will also be true of other northern-border communities dependent on Canadian electricity or gas.

Fresh fruits and vegetables are another key set of goods highly affected by the tariff push, as Mexico is the dominant source of imported American produce. Alongside Canada, it represents the vast majority of fresh berries, limes, cucumbers, peppers, and tomatoes consumed in the United States. That’s especially true in mid-winter, when many beloved foodstuffs can’t easily grow in American climates—March saw the 2nd highest import volumes for Mexican fruits & vegetables last year. Alongside a variety of other foodstuff, Mexico is also a major source for imported soft and hard drinks, while Canada is the number one source for the (small) number of eggs the US regularly buys from abroad.

The auto sector is also key, as America is the world’s largest vehicle importer and much of North American trade is thus related to car production. The US does roughly $100B in cross-border automotive trade with Canada and another $150B with Mexico—tariffs will undermine US manufacturing, considering how intertwined trade is within the continent. Indeed, they would instead benefit the subset of European, Korean, or Japanese carmakers who do almost all manufacturing work abroad and simply ship the final product to the US. This problem is especially pronounced in the EV market, where Mexico has surged to become America’s number one source of overall EV imports while simultaneously being a major provider of EV batteries and parts to American factories.

Indeed, the size of the nearby car industry is one of the most important factors in determining local trade war risks—hence why the state of Michigan may have the most to lose right now. Its proximity to Canada and abundance of auto manufacturers means that the state’s total trade volume with Canada, Mexico, and China is 1/4 the size of its GDP. Several other states stand out for their high exposure—especially Mexico’s neighbor Texas, refinery hub Illinous, and other manufacturing states near the Great Lakes.

Conclusions

Trump’s trade war continues to escalate as countries retaliate at to massive tariffs he’s imposed. Xi Jinping had already hit roughly $12B in energy, tractors, trucks, and agricultural machinery when Trump imposed 10% tariffs on China last month. In response to Trump doubling the tariff on all Chinese imports to 20%, China has now hit $22B in US farm exports with retaliatory tariffs while also placing restrictions on the operations of several US multinationals. The largest US export hit was soybeans—one of the top victims of Trump’s first-term trade war—alongside cotton, sorghum, meats, poultry, and more. In targeting lots of farm products, Xi is still unsubtly trying to concentrate fire on Trump-supporting constituencies to minimize the political benefit of pursuing the trade war.

Indeed, the Canadian government is pursuing a similar strategy with its first tranche of retaliatory tariffs, while drawing up plans for an even larger response if the trade war persists. In a sign of escalations that might be coming, Ontario Premier Doug Ford was planning to cut off power to sections of bordering US states, but has seemingly moderated to “only” implementing a 25% export tax. For her part, Mexican President Claudia Sheinbaum is holding off on official retaliatory measures until the week. Yet Trump seemingly shows no interest in backing down, instead only wanting to push this self-destructive battle even further. Just a few weeks into his 2nd presidency, Trump’s tariff blockade is already escalating well beyond the trade wars of his 1st term.