A look at Trump’s tariffs and the economic consequences for consumer prices and businesses

William Brangham:

President-elect Trump is wasting no time when it comes to making good on his promise to impose tariffs on foreign nations to get them to alter their behavior.

Last night, Trump announced that he would slap major new tariffs on Mexico, Canada and China on his very first day in office, 25 percent on goods made in Canada and Mexico, 10 percent on products made in China. Trump said he'd do this in response to migrants crossing into the U.S., as well as the failure to stop the flow of drugs like fentanyl into America.

Mexico's President Claudia Sheinbaum reacted today that she would have no choice but to retaliate if Trump imposed the tariffs.

Claudia Sheinbaum, Mexican President (through interpreter):

For every tariff, there will be a response in kind until we put at risk our shared enterprises, yes, shared. For instance, among Mexico's main exporters to the United States are General Motors, Stellantis and Ford Motor Company, which arrived in Mexico 80 years ago.

Why impose a tariff that would jeopardize them? Such a measure would be unacceptable and would lead to inflation and job losses in both the United States and Mexico.

William Brangham:

The Chinese embassy in the U.S. also responded, saying — quote — "No one will win a trade war."

Canadian Prime Minister Justin Trudeau said he spoke with Trump on the phone later and said he will hold an emergency meeting with Canada's provincial and territorial leaders.

The economic consequences of these tariffs could be enormous, involving multiple industries, consumer goods and groceries. Put together, last year, China, Mexico and Canada bought more than $1 trillion worth of U.S. exports, and they sold nearly $1.5 trillion worth of goods and services to the U.S.

So to help us understand more about what's happening, we are joined by economist Mary Lovely. She's a senior fellow at the Peterson Institute for International Economics.

Mary, thank you so much for being here.

We should say that we do not know if Trump is going to go through with this threat, as he stated it. But let's say he does, for the sake of conversation. Mexico, Canada, and China are enormous trading partners of ours. If these tariffs get slapped on, what does that mean for businesses and consumers?

Mary Lovely, Peterson Institute for International Economics: Yes, it's great to be here with you, William.

I think, in a word, what it means is nothing good. So these three trading partners are about one-third of all our exports and imports. So it's an enormous part of the business that we do. And, clearly, if he goes ahead and puts these tariffs on these imports, we are going to see a number of important ramifications, first for businesses and for consumers.

For businesses, obviously higher costs, supply chain disruptions, and possibly the movement of investment out of the United States or away from the United States. For consumers, higher prices at the cash register and, as we have shown in previous work, a burden that will form more heavily on the poor and the middle class.

So, really nothing good coming out of these tariffs.

William Brangham:

Which industries, products, kinds of things in particular, would these fall most heavily?

Mary Lovely:

Well, it depends.

If you look at Canada, we're going to be looking at crude oil, because he hasn't — president-elect Trump hasn't said if he's going to have any carve-outs, lumber, aluminum, even uranium. But, of course, we always have to put at the top of the list autos.

The North American automobile industry, Canada, U.S., Mexico, is fully integrated. Some vehicles cross the border more than seven times before they get onto the auto lot, dealers' lot. So that tells you something about how integrated these production processes are and how truly disruptive a 25 percent tariff would be.

When we add into — add in the fact that almost surely Canada and Mexico will retaliate in kind, we're looking at an enormous increase in the cost of building an automobile in North America.

William Brangham:

And if those tariffs fall on Mexico, what kind of product or supply chain disruption could we see there?

Mary Lovely:

Well, interestingly enough, aside from autos, Mexico has become a more and more important supplier of electronics and electrical devices.

And, sure, some of this is investment from China, but it's investment from many U.S. friends and allies. And, in fact, Mexico is an important middle country, third country. It's one that has really assisted us in moving supply chains away from China. So it has a certain irony that we would place tariffs on imports from Mexico, when they're really a very important player in the move to diversify U.S. supply chains and increase economic resilience.

William Brangham:

Your particular expertise is in China. Do you sense that China would similarly retaliate?

Mary Lovely:

It's a question this time, William. We saw that China was careful about how it retaliated during the 2017-2018 trade war. It retaliated in kind, but moderated. It stopped when the U.S. stopped.

Right now, China has its own problems. It has a weak domestic demand. It has a soft employment, so it's trying to increase jobs. A trade war with the U.S. is definitely not something that it welcomes. So I think the Chinese will think long and hard about whether they're going to retaliate. They could always choose to retaliate by blocking exports of the things the U.S. is still very dependent on them for.

William Brangham:

I mean, Trump is threatening these because he wants China and Canada and Mexico to change their behaviors, vis-a-vis the migrants and drugs coming in.

Now, it's a completely separate conversation as to how much ability those governments have to do those things. But if the economic pain of these tariffs are as severe as you say, do you think that that's going to dampen Trump's ardor for them?

Mary Lovely:

Oh, yes. I think the markets today really basically shrugged this off. I think there's a big discount on whether he will actually do it, given the economic stakes.

So I think many people believe that this is a form of opening negotiations, trying to force these countries to shoulder more of the burden of Border Patrol and of drug introduction in particular. Of course, it does ignore all the progress that we have made in both of these areas.

For example, Customs and Border Patrol now focus their fentanyl efforts mainly on the southern border, believing that fentanyl is coming in basically across the border oftentimes in motor vehicles, as opposed to directly from China. We have also seen U.S.-Canada make enormous progress in bringing down illegal migration through the northern border.

So a lot of progress is being made prior to president-elect Trump taking office. So it's really hard to see what more these countries will do. I'm sure they will talk to him and try to find ways. But it's one that we have seen before from President Trump. We saw it in his first administration.

William Brangham:

All right, Mary Lovely of the Peterson Institute, thank you so much for your insights.

Mary Lovely:

Thank you.