US tariffs take effect and Mexico, Canada and China retaliate

WASHINGTON (AP):

President Donald Trump launched a trade war Tuesday against America’s three biggest trading partners, drawing immediate retaliation from Mexico, Canada and China and sending financial markets into a tailspin as the US faced the threat of rekindled inflation and paralysing uncertainty for business.

Just after midnight, Trump imposed 25 per cent taxes, or tariffs, on Mexican and Canadian imports, though he limited the levy to 10 per cent on Canadian energy. Trump also doubled the tariff he slapped last month on Chinese products to 20 per cent.

Beijing retaliated with tariffs of up to 15 per cent on a wide array of US farm exports. It also expanded the number of US companies subject to export controls and other restrictions by about two dozen.

Canadian Prime Minister Justin Trudeau said his country would plaster tariffs on more than $100 billion of American goods over the course of 21 days.

“Today the United States launched a trade war against Canada, their closest partner and ally, their closest friend. At the same, they are talking about working positively with Russia, appeasing Vladimir Putin, a lying, murderous dictator. Make that make sense,” Trudeau said.

Mexican President Claudia Sheinbaum said Mexico will respond to the new taxes with its own retaliatory tariffs. Sheinbaum said she will announce the products Mexico will target on Sunday in a public event in Mexico City’s central plaza, perhaps with the delay indicating Mexico still hopes to de-escalate the trade war set off by Trump.

As he promised voters, the US president is abandoning the free trade policies the United States pursued for decades after World War II. Trump argues that open trade cost America millions of factory jobs and that tariffs are the path to national prosperity. He rejects mainstream economists who contend that such protectionism is costly and inefficient.

Import taxes are “a very powerful weapon that politicians haven’t used because they were either dishonest, stupid or paid off in some other form,” Trump said Monday at the White House. “And now we’re using them.”

Dartmouth College economist Douglas Irwin, author of a 2017 history of US tariff policy, has calculated that Tuesday’s hikes will lift America’s average tariff from 2.4 per cent to 10.5 per cent, the highest level since the 1940s. “We’re in a new era for sure.”

US markets dropped sharply Monday after Trump said there was “no room left” for negotiations that could lower the tariffs. Shares were mostly lower Tuesday after they took effect.

According to estimates by the Yale University Budget Lab, Trump’s tariffs amount to a tax hike of roughly $1.4 trillion to $1.5 trillion over 10 years, a massive increase that would disproportionately hit lower-income households.

The Canada and Mexico tariffs were supposed to begin in February, but Trump agreed to a 30-day suspension to negotiate further with the two largest US trading partners. The stated reason for the tariffs is to address drug trafficking and illegal immigration, and both countries say they have made progress on those issues. But Trump has also said the tariffs will only come down if the US trade imbalance closes, a process unlikely to be settled on a political timeline.

The tariffs may be short-lived if the US economy suffers. But Trump could also impose more tariffs on the European Union, India, computer chips, autos and pharmaceutical drugs. The American president has injected a disorienting volatility into the world economy, leaving it off balance as people wonder what he will do next.

“It’s chaotic, especially compared to the way we saw tariffs rolled out in the first (Trump) administration,” said Michael House, co-chair of the international trade practice at the Perkins Coie law firm. “It’s unpredictable. We don’t know, in fact, what the president will do.’’

Democratic lawmakers were quick to criticise the tariffs, and even some Republican senators raised alarms.

Senator Susan Collins, Republican from Maine, said she’s “very concerned” about the tariffs going into effect because of her state’s proximity to Canada.

“Maine and Canada’s economy are integrated,” Collins said, explaining that much of the state’s lobsters and blueberries are processed in Canada and then sent back to the US.

The world economy is now caught in the fog of what appears to be a trade war.

Trudeau said Canada would impose 25 per cent tariffs on US$155 billion Canadian ($107 billion US) worth of American goods, starting with tariffs on US$30 billion Canadian ($21 billion US) worth of goods immediately and on the remaining amount on American products in three weeks.

“Our tariffs will remain in place until the US trade action is withdrawn, and should US tariffs not cease, we are in active and ongoing discussions with provinces and territories to pursue several non-tariff measures,” Trudeau said.

The White House would like to see a drop in seizures of fentanyl inside the United States, not just on the northern and southern borders. Administration officials say that seizures of fentanyl last month everywhere from Louisiana to New Jersey had ties to foreign cartels.

Damon Pike, technical practice leader for customs and trade services at the tax and consulting firm BDO, suggested the responses of other countries could escalate trade tensions and possibly increase the economic pressure points.

“Canada has their list ready,” Pike said. “The EU has their list ready. It’s going to be tit for tat.’’

Tim Houston, the leader of Canada’s Atlantic coast province of Nova Scotia, said he would direct the Nova Scotia Liquor Corporation to remove all US alcohol from store shelves. Houston also said his government will limit access to provincial procurement for American businesses and double the cost for commercial vehicles from the United States on a tolled highway.

The Trump administration has suggested inflation will not be as bad as economists claim, saying tariffs can motivate foreign companies to open factories in the United States. On Monday, Trump announced that Taiwan Semiconductor Manufacturing Company, the computer chipmaker, would be investing $100 billion in domestic production.

Still, it can take time to relocate factories spread across the world and to train workers.

Greg Ahearn, president and CEO of the Toy Association, said the 20 per cent tariffs on Chinese goods will be “crippling” for the toy industry, as nearly 80 per cent of toys sold in the US are made in China.

“There’s a sophistication of manufacturing, of the tooling,” he said. “There’s a lot of handcrafting that is part of these toys that a lot of people don’t understand … the face painting, the face masks, the hair weaving, the hair braiding, the cut and sew for plush to get it to look just so.” All of that killed labour “has been passed through generations in the supply chain that exists with China.”

For a president who has promised quick results, Ahearn added a note of caution about how quickly US factories could match their Chinese rivals.

“That can’t be replicated overnight,” he said.