Donald Trump has won himself few friends with his aggressive tariffs rollout against a slew of nations – including some of the United States’ closest trading partners – and this has led fellow world leaders, quite a few economists, and commentators to shake their heads, wondering ‘what is he up to?’
Rhetoric accompanying these levy threats has been equally uncompromising, with many leaders finding themselves the target of a Trumpian talking-to about how their country may have exploited the goodwill of the U.S. and its economy.
On Wednesday (U.S. time), it was the turn of Irish taoiseach Micheal Martin – meeting Trump and his deputy J D Vance for the annual meeting before St Patrick’s Day – who was scolded about Ireland snapping up American pharmaceutical companies.
Similarly, Australia has recently been accused – this time by Commerce Secretary Howard Lutnick – of apparently “dumping” excess aluminium on the U.S. market. This is being used as the justification for 25% tariffs hitting imports of the metal, in addition to steel, which rolled out in Week 11.
But perhaps the most standout (and head-scratching) example is the U.S.’s northern neighbour, Canada, which is being slapped with the same 25% tariffs on its steel and aluminium production as well as an across-the-board levy (another 25%) on all Canadian goods flowing into the U.S.
An increasingly sour relationship between neighbours
The latter was announced almost as soon as Trump came into office, with the President saying he would be targeting Canada and Mexico jointly in response to drugs – particularly fentanyl – coming into the U.S. from north and south.
Of course, this garnered a reaction, plus a series of retaliatory actions which indicated the economic and political relationship between the countries was souring.
On March 10, Ontario Governor Doug Ford announced electricity normally flowing from the province into three U.S. states – Michigan, Minnesota, and New York – would be hit with a 25% surcharge to answer Trump’s metals tariffs.
This prompted a threat by the President to push the latter to 50%, before a compromise was eventually reached between Ford and U.S. Commerce Secretary Howard Lutnick that will facilitate a rollback of the electricity charges. Levies of 25% against Canadian metals still went ahead on Wednesday, March 12.
The previous day, Trump suggested the best way to resolve the issue would be for Canada to become the 51st state. “This would make all Tariffs, and everything else, totally disappear,” he said.
Energy the centrepiece of the Canada-US relationship
It’s difficult to overstate how irrational Trump’s approach seems to be – not only his threats against the Canadian economy, but also the language wrapping it – given the integrated relations between the two in previous years.
Energy is a great place to start, with Canada and the U.S. being each other’s largest trade partner in this sector, among which is an established, nearly century-long trade in electricity underpinned by an integrated grid.
In the past two decades, reliance has been increasingly one-way, with the U.S. importing more electricity than it exports; this affects 22 states. According to Canadian nonprofit media organization Narwhal, the province of Ontario is responsible for providing $700 million worth of electricity – that is, power to 1.5 billion homes.
Professor Wesley Widmaier – from Australian National University (ANU)’s Department of International Relations – believes the tensions between the two can be compared to a personal relationship.
“There are some cases where just like in a relationship, you can say something to your partner where it changes everything,” he said.
“Trump’s ill-considered rhetoric about annexing Canada has affected what could be a lasting change like relations between the two sides, the two people.
“I was just in the U.S., and many Canadians are quite angry and offended, and that affects people where they live.”
Professor Widmeier said Canada was just one country which had been hit with uncertainty over its working relationship with the U.S. going forward.
“In the context of Europe, he’s called Article 5 into doubt by seeming to side with the Russians against Ukrainians on foreign policy,” he said.
“For Australia, I don’t think we’ve reached that point yet, I don’t think he’s engaged in any really egregious rhetoric that would change people’s views of the United States on the ground, so we can play that game of biding and waiting to see to what extent Trump himself pulls away from some of these policies.
“But it’s led to a reconsideration and in some places a deep questioning.”
Certainly, when it comes to Canada, the trade war doesn’t seem to be slowing down any time soon, with the country promising to match the U.S. “dollar for dollar” in response to the 25% metal tariffs which came in on Wednesday, announcing levies against $30 billion worth of imports from the country – that is, its own 25% tariffs against American steel, computers, and sports equipment.
Can Europe (and other allies) rely on the US for protection?
Professor Widmeier said when it came to geopolitical engagements around defense, Donald Trump had returned to some longstanding preoccupations – particularly that of the U.S.’ allies relying too much on it – but had delivered these very differently.
“Burden sharing has always been an issue between the U.S. and the Europeans: it goes back to the Kennedy administration in the 1960s,” he said.
“What’s different this time – and it goes back to Trump’s statements from his first term – a suggestion that if NATO allies aren’t paying their 2% or whatever the exact amount is, that the US might consider not protecting them.
“It’s taking what was an iron-clad alliance and changing it to something transactional.
“So again, before Trump, if the Russians invaded Lithuania, Estonia, or Latvia, the U.S. – and NATO – would respond quite seriously. You have to think that that might not happen now.”
Can Trump ‘bring back American jobs’ with his tariff policy?
Professor Widmaier said it was plausible this was what the US President was aiming for long term: Particularly given the support he’d received in states most affected by the free trade, and Chinese dominance in manufacturing.
“Free trade creates winners and losers, protectionism creates winners and losers,” he said.
“To the extent that Trump has a constituency – ‘Build American Manufacturing’ states, the blue wall, Pennsylvania, Wisconsin, Michigan, – they all want to bring those jobs back.
“To the extent that he’s pressuring companies to build factories in the States and that would bring jobs back to the States, it’s not implausible.
“Would that be a rational economic policy? Is that the best allocation of goods and services? No. So there’d be many more losers than there’d be winners.
“The case for free trade is the winners compensate the losers and everyone’s still better off. The problem is for the last 50 years, the losers from free trade have gone pretty uncompensated, and that’s one of the reasons for Trump’s rise.”
The tariff fallout, and how voters might respond
Undoubtedly one of the main things to say about Trump’s tariff policy, and the back-and-forth reactions it’s provoked, is that world markets have so far been taking a significant hit thanks to economic uncertainty.
Here in Australia, the ASX200 has experienced four consecutive weekly declines on the back of Trump’s levy threats, and Wall Street has experienced a similar downturn. Professor Widmaier said this would be an issue the President could not ignore.
“I can tell you, when I talk to people back in the United States, stock market swoon has gotten a lot of people’s attention,” he said.
“Americans have their retirement funds tied up in 401K accounts – which are bundles of stock market investments – so when people see the stock market go down, they see their retirement savings go down, and Trump is aware of this.
“And meeting – as he did recently – with the business executives round table, one can imagine this explains a bit of his erratic back and forth kind of reactions.”
The White House has commented that some short-term pain might be necessary for Trump’s trade plan to be realised. And this could be strategic.
“When he’s warning people, when he’s suggesting that a recession is likely, that’s a little more esoteric for people,” Professor Widmaier said.
“And there’s a saying in politics, ‘get your recession out of the way early’.
“Dick Cheney, when the Bush administration back in 2000 took power, Cheney was very quick to declare that the US was likely to head into a recession, because that’s a recession you can blame on the outgoing guy, and 4 years is a long time, so people aren’t going to remember it, they want to get it out of the way.”
He added that while many were talking about the potential impact of tariffs on inflation, there was not likely to be a direct effect, although the instability brought on by constantly shifting policy was something to watch.
“When people say that tariffs are going to cause inflation, I’m sceptical to the extent that these price increases are sector-specific, one-off price increases,” Professor Widmaier said.
“A one-off increase in prices because of a tariff on a particular good – if it doesn’t become embedded in people’s expectations – will not cause prolonged inflation.
“If there are constantly increasing tariffs, where he’s got 25%, then 50%, and cyclical tariffs, and things start to feed on themselves, yes that will be inflationary.”
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