On Threat of Tariff

President Trump warned that he would levy tariffs, and he has done just that.  Colombia refused to accept repatriated Colombians.  Have a tariff.  Canada and Mexico aren't securing their borders with the US.  Tariff.  China is still enabling the Fentanyl trade.  Tariff.

Though Trump has claimed that these countries would be paying into the US treasury with these tariffs, that is looking at the tariff backwards.  If Canada was selling widgets in the US for $10, but now they are $12.50 thanks to the tariff, who is paying the extra $2.50?  Well, the customer.  That would be the American who chose to buy the Canadian widget despite the price increase.  So, does this just make the tariff self-defeating?  No.  Widget buyers in American will now be more likely to buy American widgets or maybe Italian or German widgets, which are now cheaper than the Canadian widget.  Overall, the number of widgets - and other products - that Canada sells in the US will drop.  The higher the tariff goes, the greater the fall in sales of Canadian goods.

Let's look at the big picture.  Canada exports approximately $500 billion in goods to the USA, while the US sends about $450 billion to Canada.  Now, that $500 billion accounts for almost one quarter of the Canadian economy.  By contrast, the $450 billion is only 2% of the US economy.  Who has leverage here?  A trade war between the US and Canada will be devastating for one and barely an inconvenience to the other.

How about Mexico?  Mexico exports $493 billion to the US while importing only $362 billion from the US.  That means 35% of the Mexican economy counts on US trade while less than 2% of the US economy depends on exports to Mexico.  Which party should be more eager to prevent an interruption in the status quo?

Many countries have based their economies on selling to the US, because the US is the biggest economy.  Being on the receiving end of a trade war with the US will be a heavy blow to their economies.  The tariff is not meant to be implemented long term.  It is a negotiation tool that encourages our trade partners to implement our preferred policies.