How Trump's tariffs can become a curse for US

As President Donald Trump pushes forward with his plan to impose tariffs on major trading partners like Canada, Mexico, and China, the economic consequences are becoming more apparent.

These tariffs, which could reach as high as 25%, are viewed as a threat to North American trade, with many experts fearing the bulk will be borne by the US itself.

The tariffs are expected to raise costs for US consumers, and strain the global trade system.

If implemented, these tariffs could cause significant losses across all three nations, with smaller economies such as Canada and Mexico being especially vulnerable.

Industries like agriculture, automobiles, and energy will be hit hard.

The US auto industry, heavily reliant on integrated supply chains with Canada and Mexico, faces risks from these tariffs.

According to the Peterson Institute for International Economics, a 25% tariff could reduce US GDP by $200 billion.

While some industries, such as US tomato growers, may benefit from tariffs on Mexican imports, most US consumers will face higher prices for goods like avocados, steel, cars, and petroleum, which could dampen consumer spending and slow economic growth.

Canada, whose economy is closely tied to the US, would suffer from the tariffs, especially as the US imports about 80% of Canadian oil.

Disruptions in trade could lead to significant losses in key industries like oil and auto manufacturing, with some economists predicting a 2-2.6% reduction in Canada's GDP.

Mexico, even more dependent on US trade, could experience severe economic challenges. With around 80% of its exports going to the US, Mexico could face deindustrialisation, factory closures, and job losses in sectors like automobiles and agriculture. Though a weaker peso might attract US tourists, it wouldn't offset the damage to other sectors.

Trump's tariffs on China are part of his broader strategy to address trade imbalances.

Despite threatening up to 60% tariffs, US-China trade continues, with Chinese exports to the US growing by 4% between November 2023 and November 2024.

Yet, these tariffs may not achieve their desired results.

The US trade deficit with China continues to widen as companies rush to buy Chinese goods before higher tariffs are imposed. While tariffs have led to a short-term increase in Chinese exports, they have also fueled China's trade surplus, which reached a record $992 billion in 2024.

Although Trump sees tariffs as a way to protect US industries and reduce trade imbalances, they could ultimately harm the US economy.

The tariffs would lead to higher prices for consumers, supply chain disruptions, and job losses. The global trade system, already under strain, could become more unstable, weakening rather than strengthening the US economy.

Historically, high tariffs have been linked to economic downturns, such as during the Great Depression. Almost 90 years ago, President Franklin Delano Roosevelt warned that protectionist policies could lead to disastrous consequences. Trump's approach seems to ignore these historical lessons, raising the risk of repeating past mistakes.

Data from Trump's first term shows that tariffs did little to reduce America's trade deficit. Tariffs tend to strengthen the dollar, which reduces demand for US exports.

While Americans buy fewer foreign goods, they also sell less to the rest of the world. To address the trade deficit, the US would need to increase its savings rate or reduce investment, neither of which would benefit the economy in the long term.

Recent tariff policies have not led to job creation in American factories either. Manufacturing, as a share of US employment, has continued to decline, while some industries protected by tariffs, like steel, have seen increased revenues.

However, this came at the expense of other sectors facing higher input costs.

Trump's proposal to replace income taxes with tariffs is another troubling aspect of his economic strategy. While this might seem attractive, tariffs would ultimately raise import prices for American consumers, undermining the benefits of eliminating income taxes.

Even a 10% universal tariff would only cover a small fraction of the federal budget and likely reduce imports as it raises prices.

The most optimistic view of Trump's tariff strategy is that they are a negotiating tool. While the US is the world's largest market, tariffs are likely to create more problems than they solve. Once imposed, tariffs are hard to retract, and their effectiveness diminishes over time.

Many of Trump's supporters look to the late 19th century as a period of high tariffs and strong growth. However, scholars have found that high tariffs shielded less-productive industries and raised living costs. Other factors, such as population growth and stronger rule of law, were more significant drivers of prosperity.

By distorting history and economics, Trump risks leading the US and the world down a path of protectionism and economic stagnation.