Comment: Trump may not have trade leverage he thinks he has

By Jonathan Levin / Bloomberg Opinion

In Washington, there’s widespread and bipartisan interest in addressing the flawed U.S. trade relationship with China, our chief global rival for economic and military dominance. So it’s weird that President Donald Trump officially started his international trade war of words this week by treating the world’s second-biggest economy with kid gloves. Even more bizarre, Trump aimed his first broadsides at Mexico and Canada, America’s friends and neighbors. Huh?

Both nations are signatories to the United States-Mexico-Canada Trade Agreement, a Trump baby that the president hailed as the “fairest, most balanced and modern trade agreement ever achieved.” And while our North America trade deficits have increased in the years since it went into effect in 2020, partner nations had every intention of revisiting the deal in 2026 to address perceived shortcomings. Trump seems to have singled them out because they’re convenient scapegoats that need the U.S. and are easily bullied. In Trump 1.0, a similar period of Sturm und Drang culminated in the trade deal; allowing him to fulfill a political promise to his supporters, even as he essentially just rebranded and updated the North American Free Trade Agreement, or NAFTA. It is understandable that he might want to try a similar formula again, but he’s playing with fire by using the tactics a second time.

First, America’s North American neighbors are familiar with Trump’s playbook. Canada has already worked up a list of politically sensitive U.S. imports that it could tariff in response, and Bloomberg News reports that it includes such products as Florida orange juice and Kentucky bourbon. Mexico is surely drafting much the same type of list. In the beginning, these tit-for-tats can seem like small fries, yet the broader flow of commerce is anything but insignificant.

Canada and Mexico are America’s two largest foreign markets, amounting to a third of all U.S. exports. As my Bloomberg Opinion colleague Liam Denning has pointed out, the U.S. would have a trade surplus with Canada if it weren’t for oil. Research on retaliatory tariffs during Trump’s first term showed it led to lower U.S. export prices and volumes, lower manufacturing employment, and fewer job openings, according to a recent Goldman Sachs Group Inc. report. Given these are typically targeted at sectors where they can do the most political or economic damage, Mexico and Canada could take aim at U.S.-produced autos, farm products and chemicals, among other things.

The U.S. certainly holds the most negotiating power of the group, but exercising it this time around would come at a heavier political cost. When Trump forced a renegotiation of NAFTA in his first administration, inflation was around 2 percent and 30-year mortgage rates were around 4 percent. Had he chosen to follow through with his over-the-top 25 percent tariff threats, U.S. consumers arguably would have absorbed the blow.

In November, Trump was elected by an inflation-weary America. The consumer price index is up around 2.9 percent from 12 months ago and mortgage rates are still around 7 percent. As Trump and his negotiating counterparties know, voters wouldn’t take kindly to price hikes for Mexican autos or supermarket products or a spike in pump prices resulting from a tariff on Canadian oil. Nor would they appreciate the continued upward pressure on mortgage rates that may result from signs of reigniting or sticky inflation.

There would be another cost to exercising America’s ability to hurt its neighbors economically. Crime and immigration were the cornerstones of the Trump political agenda — even more so than trade — and Trump would risk undermining his own objectives by driving neighbors into economic slowdowns or recessions, particularly Mexico. America’s neighbor to the south sends around 80 percent of its exports to the U.S., and a full-blown trade war would increase the incentive for working-class Mexicans to seek employment in America. In a worst case scenario, it could even increase the supply of workers to drug cartels if the formal economy falters.

Finally, the U.S. risks alienating two large and important allies at a time when the world has grown more dangerous, and we’d do well to keep our friends close. This generally falls outside of my remit as a markets and economics columnist. But Hal Brands, a Bloomberg Opinion colleague and the Henry Kissinger Distinguished Professor at Johns Hopkins University’s School of Advanced International Studies, recently wrote that there’s some sound logic behind the idea of reconsolidating U.S. leadership in the American hemisphere. Brands says that closer ties on trade, investment and security are a “no-brainer.” The problem is that Trump is leading with outlandish threats instead of diplomacy, hurting relationships and undermining America’s moral authority to push back on bullying by the likes of Russia or China.

Even more confusing is why Trump seems to have deprioritized China. (One theory: He’s trying to play “good cop” for now as he pushes for a deal to transfer TikTok into U.S. hands. I’ll leave it at that, because I don’t have any better ideas.)

With Trump, tariffs seem to have emerged as his blunt tool to address every problem; economic or otherwise. In some cases, Trump may actually see an opportunity to raise revenue. In others, he may intend primarily to curb trade flows to protect domestic industry. And in others, he may think he’s using tariff threats as leverage to get America’s trade partners to lower their tariffs on us. But in the case of Mexico and Canada, it’s not clear that he could achieve any of those things without causing significant collateral damage at home. That leads to the conclusion that this isn’t really about economics at all but, instead, about Trump’s beliefs about immigration and drug trafficking. “We’re thinking in terms of 25 percent on Mexico and Canada, because they’re allowing vast numbers of people” across the border, Trump told reporters on Monday. To Brands’ point, those may be grievances better addressed with cooperation than wild threats. But on the questions of trade and the economy, it’s hard to image how the U.S. will prosper through Trump’s latest game of tariff chicken.

Jonathan Levin is a columnist focused on U..S markets and economics. Previously, he worked as a Bloomberg journalist in the US, Brazil and Mexico. He is a CFA charterholder.