THREAT OF TRUMP’S TARIFFS

Samantha Amerasinghe ponders on how US tariffs could impact global trade

As the new US administration swings into action, the threat of trade tariffs is imminent. President Donald Trump plans to impose tariffs on Mexico, Canada and China, in order to ‘oblige’ these countries to address illegal migration and drug trafficking.

However, Trump’s threats could be mostly rhetoric; he may not pursue such a protectionist agenda.

But his intentions are clear and he’s expected to implement the most protectionist trade policy the United States has seen in nearly a century. Trump has also announced potential tariffs on BRICS nations, and possibly others, if they create an alternative currency to the dollar for international trade.

It’s necessary to assess the evolving trade landscape, which involves China’s response to Trump’s tariffs, the implication of tariffs on Mexico and Canada, and how the US Dollar’s value against currencies of major trading partners will impact the effectiveness of these measures.

Global trade was steady in 2024 and is on track to hit a record US$ 33 trillion, up one trillion dollars on the prior year. This annual growth in trade of over three percent can largely be attributed to a seven percent rise in services, which contri­buted 500 billion dollars to the overall expansion.

However, uncertainty looms amid risks of trade tensions and ongoing geopolitical challenges.

The 2025 trade outlook is clouded by potential US policy shifts – including broader tariffs that could disrupt global value chains and impact key trading partners. Even the mere threat of tariffs by Trump has created unpredictability and weakened the trade outlook.

Too many uncertainties surround the policy – the timing, extent and duration of the tariffs remain unknown while the retaliation expected from other countries is also a major trade headwind. The value of the dollar against currencies of major trading partners might also have an impact on the effectiveness of tariffs.

Some argue that Trump’s policies could lead to a further strengthening of the dollar. This is because other currencies may weaken in the face of lost exports, and investors could find the US a safer haven against higher interest rates or global turmoil.

A strong dollar could mean that the United States increases imports despite the tariffs – and shields American consumers from some of the price rises caused by the tariffs. It could also make American exports less competitive and thereby increase the US’ trade deficit.

On the flipside, uncertainty in the US business environment driven by tariffs, expulsion of immigrants, burgeoning debt and Trump’s intent to pressure the Federal Reserve to keep interest rates low could result in weakening the dollar.

A weaker dollar would be beneficial as it helps reduce the trade deficit.

Trump’s less aggressive stance on China with the announcement of a 10 percent tariff versus the previous threat of 60 percent suggests that Beijing may not escalate tensions with Washington as it can afford to weaken the Renminbi (RMB) further to maintain export competitiveness.

But if Trump imposes additional tariffs and trade measures, China is in a much stronger political position domestically than it was during Trump’s first term and has greater latitude to navigate external pressures on its economy.

Beijing could potentially propose a ‘Phase Two’ trade deal and draw out negotiations with the foresight that Trump would want to be positioned with a successful deal with China ahead of the 2026 midterm elections.

President Xi Jinping is better prepared to take a more assertive stance against Trump this time around with a full range of retaliatory tools against US interests.

They include counter tariffs or the imposition of export restrictions on critical minerals targeting specific US com­panies or critical industries without the need to trigger a full-scale trade war.

The stakes are high for Mexico and Canada, and they shouldn’t be taken for granted.

There would be profound implications for the motor vehicle industry, which spans all three countries and is subject to the United States-Mexico-Canada Agreement (USMCA). A 25 percent tariff on all goods crossing the border will lead to substantial cost increases; and it will impact employment, disrupt supply chains and lead to higher prices for consumers.

Tensions with Mexico are likely to exacerbate as the political and structural challenges of addressing drug cartels and immigration to meet Trump’s demands in a way that satisfies his expectations seem farfetched.

Canada’s entire trade surplus with the US comes from crude oil exports to the United States. Both countries will suffer: Canada has few viable alternatives for exporting its crude and American refineries have similarly limited options for sourcing crude to process.

Trump’s adversarial stance risks souring bilateral relations with both Mexico and Canada. And while his unilateral policies and aggressive tactics may yield some immediate concessions, they risk long-term consequences.

His policies will alienate key allies and accelerate the fragmentation of global trade networks, and erode US influence in the world economy.