After Donald Trump announced large tariffs on Mexico, Canada, and China, financial markets sprung into action to price in these potentially enormous changes to the system of international trade. In response, the US dollar surged against the Canadian dollar and the Mexican peso. Earlier today, Mexican President Claudia Sheinbaum announced that her country was working towards resolving issues surrounding illegal migration and fentanyl by sending 10,000 Mexican troops to the border.
This episode shows clearly that Trump doesn’t use tariffs to rebalance American trade, but instead as a means of threatening friends and foes with the intention of pressuring them to comply with his demands. The White House knows that tariffs in themselves do not really work to reduce trade dependencies. In a lengthy document, Trump’s incoming chair of the Council of Economic Advisers, Stephen Miran, argues that when tariffs are imposed on a country like Mexico the exchange rate between the US dollar and the peso can move to cancel out the effect.
So, for example, if Trump put a 25% tariff on all Mexican goods, the peso could fall by 25% relative to the dollar to cancel out the cost differential imposed by the tariff. This would be a net negative for the US, whose exports to Mexico would become less competitive, increasing the trade deficit between the two countries. The surge in the value of the US dollar after the tariffs were announced confirms that the mechanism works — exactly as Miran predicted.
This is not to say that tariffs and other trade war mechanisms cannot cause an enormous amount of chaos in the short run – in fact it seems to be precisely this chaos on which the President and his team are relying. Sharp moves in the currencies themselves can create financial instability in the countries affected, making Trump’s trade war well-suited to pressure Mexico and Canada to comply with his administration’s demands on immigration and drugs.
But Trump can only push his trade war so far. The countries he targets are typically ones that run large trade surpluses with the United States. When a country runs a trade surplus it accumulates financial claims on the country with which it is running this surplus. In the case of America, this typically means that the country running the trade surplus accumulates vast amounts of US Treasury bills. That is another way of saying that these countries effectively finance US government borrowing.
It is not in their interest to start dumping these bonds en masse, as doing so would create financial instability. It would also weaken the US dollar, in which case the tariffs would start impacting the countries on which they are imposed. However, the fact that this option is on the table means that if Trump pushes the tariffs too far, countries can engage in aggressive action in response.
But so long as the President’s demands are relatively reasonable – such as forcing Mexico to exert more control over its own border – the path of least resistance is to simply comply with his demands. Since Trump has a robust economic team around him who understand these dynamics, it seems likely that the new administration will know how much is too much and pull back from the brink long before provoking an aggressive response from its international partners.
What we are watching is not so much an actual trade war as it is Trump’s “art of the deal”. The President is using the leverage he has to extract concessions from his international partners that they have been dragging their feet over for years. So far, the strategy seems to be working.
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SubscribeIt’s a delight to watch this new administration in action 🙂
And to read a grown-up analysis. This is what we come to Unherd for; you simply wouldn’t read anything like this in the msm. The grasp of real-world economics and its political ramifications stands in sharp contrast to the “woe is me” of the BBC (for instance.)
Those who denigrate Unherd, take note.
A delight? Seems to me they are acting like a bull in a china shop.
Just as Trump is the poor persons idea of what a rich person is, credulous weaklings see Trump as a strong man despite his constant whining and backing down. Ludicrous.
You are focused on his words, which are tactical. If you weren’t TDS-addled you would look at his actions and see how well they are working.
Excellent piece of mental gymnastics and sophistry .
But its working
What have they accomplished so far? I don’t think it’s working. Even Donald Trump is starting to talk about reining Elon Musk in.
Yes, Trump has accomplished nothing so far. Riiiight.
Where there’s a will there is a way.
It’s entertaining to watch how wrong the credentialed classes and their models for understanding the world are on a daily basis under Trump. Common sense strong arming is proving to be enormously effective for Trump to extract reasonable concessions from trading partners, who would have guessed??
Anyone who isn’t a sheltered collectivist viewing the world and humanity through rose colored ideological lenses is the answer, including many of the elites who were driving globalist ideals because it benefited them personally.
Good article
One of few, granted, but I have noticed an increase in reasonable analysis in the most unexpected places. Not the guardian, don’t think there’s an apple left, just a bowl.
So this is partisan, from Fox. Doesn’t mean it’s not worth reading.
Far from it
https://www.foxbusiness.com/fox-news-opinion/trumps-tariff-critics-trading-overblown-unfounded-fears
The White House knows that tariffs in themselves do not really work to reduce trade dependencies
.
I’m not sure. Tariffs not only reduce dependencies, but also return back production. By returning back production and cutting immigration you feed your own citizens
Tariffs are better used as a stick to get compliance on other issues when it comes to relatively friendly nations like Canada and Mexico. We don’t really want to antagonize these countries or have conflicts with them. We just want them to stop expecting us to ignore the problems they cause us out of some sense of being a benevolent global overlord. We want X,Y, and Z or else tariffs. The reason they’ll mostly cave is because the demands are fairly reasonable and cheaper than it would be to endure the short term chaos tariffs would create and there’s a risk of starting a cycle of retaliation that escalates into an actual trade war. The other problem is the catch 22 the author mentions. If they don’t use dollars to trade with the US, what will they use them for? They’re not worth anything in and of themselves. They’re just paper. Nations can’t start dumping their dollars and savings bonds on the global market without tanking the value of the dollar outside the US and losing huge sums of money on the deal as well as undermining the system that has underpinned their economic models.
The fundamental problem is that yes, the US will suffer from any trade wars, but so will others, and most nations stand to suffer more than the US does because the US has a lot more land, resources, and technology than most other nations. In other words, the US holds significant assets. For anyone keeping score wealth is not equal to money. All currencies in the world are basically fiat money whose value is wholly dependent on the government issuing them. They serve as a measure of wealth within the countries in question, but they are just paper. Wealth comes from actual productive assets such as land, mineral resources, industry, factories, technology, and people. Whatever happens to the piles of dollars held by foreign nations and whatever the consequences for US federal borrowing, those assets still exist. That’s the wealth that money is supposed to measure, but in the sense of a global economy with multiple nations with their own currencies, the currencies themselves mean jack squat. The dollar should never have become a de facto global currency, but it did, and that has consequences. Nations that hold large amounts of dollars are essentially at the mercy of the US government and taxpayers for any return on those fake ‘assets’. The USA can either print more to deflate the value or start an escalating tariff war that could lead to a complete embargo and leave nations holding warehouses full of paper now worth nothing. Whatever effects a currency crisis may have, and they may be quite serious for all involved, economies will adjust. The crisis will not last forever and ultimately wealth will again be decided by who holds real assets, and few can rival the US in terms of real assets. So, yeah, Mexico would prefer to just secure the northern border rather than risk economic ruin that would be worse for them.
As a fundamentally inward looking nation with a strong history of isolationism that views the rest of the world mostly with disinterest, the USA was a terrible choice for a global hegemon and world economic leader. Why any foreign nation bought into the dollar as a global currency is utterly beyond my reasoning. I get that greed is a thing and nations wanted to sell to the US to build their own wealth, but somebody had to understand they were basically surrendering their economic independence to a foreign government and giving the US government enormous influence and power that they could then use to benefit themselves at the expense of others. That’s what’s really going on here. The dollar is US currency, and at the end of the day, nobody else but the US government can do a damn thing about it. Thus, it isn’t Trump the nations of the world should fear, it’s the people. If the American people ever got angry enough with the rest of the world, they could elect someone far more radical and far more isolationist than Trump who would wreak far more havoc than he can imagine. Just so everybody’s clear on this point, Americans will elect whoever they damn well please regardless of what Europeans, Chinese, or anybody else thinks. The old rules based order was something implemented by the ruling class who were always more international and outward looking than the people, but this is a democratic nation, and everything the government does is subject to the people’s consent. Now the people have withdrawn their consent and have empowered a leader to change the rules and demand concessions for some aspects of the old order to continue. This is where the prophets of globalism have led us. I will lay most of the blame at their feet.
You forgot why we use us currency. It’s because their democracy is the best and most stable in the world. It only has to fail 50 times less than any other to be better.
Now tell me that is the case or will ever be the case anywhere else?
The us was in the hands of marxists for the last 20 years and survived. It survived because people voted with their feet and left NY and California.
But you know this already. Would you rather hold US dollars or rubbles ?
Everyone knows the answer don’t be shy,
These are the demented ramblings of a very troubled mind
But let’s have some fun anyway!!! I’m sure we’d all love to hear more about these “Marxists” that were running the US for the last 20 years
Herbert Marcuse influenced much of humanities programmes and French post Modernists from the late 1960s.
Have you got the faintest idea what a ‘Marxist’ is?
They call themselves the ndp in Canada.
So, no, Bret hasn’t got the faintest idea of what a marxist is but he’s pretty sure they are bad, Except Groucho – he’s ok.
If you’re asking what I mean by Marxists I’ll answer you.
I know what a Marxist is. Its pretty obvious you don’t,
I asked you to tell us about the Marxists who you think have been running the US for the last 20 years. Why don’t you share your insights with the group?
Why any foreign nation bought into the dollar as a global currency is utterly beyond my reasoning.
The US has been the most economically stable nation for 100 years due to the rule of law and reliable court system.
For the past 25 years, America has been engaged in wars that have eroded global trust, leaving the country financially drained and deep in deficit—much like the very nations it once looked down upon, including poorer African countries. Instead of investing in its own infrastructure or economy, the U.S. focused on destabilizing simple, often uneducated communities armed with nothing more than AK-47s—not even modern military equipment like tanks.
Now, with active wars paused, America has been jolted awake by a harsh reality: it is economically broken. Yet, despite this financial crisis, it continues to wield its military power in distant conflicts that have little to do with its own land or people. The irony is striking—America isn’t broke because of tangible, material struggles, but because it has been chasing abstract ideals, detached from the practical realities of the world.
Every country is concerned by their sovereignty and real national security of its people, US by its idea and thoughts – invisible, changeable and not their business. It is a bit madness!
America idea is China should “think” like us. China idea is safe land and people! who do you think will win?
The notion that the U.S. can thrive independently from the rest of the world is no longer practical and its repetition does not make it true.
America’s economy is heavily reliant on financial speculation rather than manufacturing, and it produces very little domestically. If the U.S. were truly self-reliant, its economy wouldn’t be so vulnerable to its own policy shifts, nor would it view competition from alliances like BRICS as a threat. The reality is that all countries are interconnected, and America, perhaps more than most, depends on these global ties. At best, you could argue that the U.S. might have a slightly longer buffer than Europe in maintaining its current position. However, in the long run, it will require essential resources from abroad, as transitioning to full-scale, on-demand domestic manufacturing is neither simple nor immediate.
America power is embolden by its reserve currency and anyone can actually imagine if that is no longer there what would be the thing US offers, other than great weapons which are important but need crisis and consent from its people?
MHO, America is on the path of isolationist and protectionist but will need about 25 years and serious financial overhaul to reach where China is in terms of self-reliance of real products and services not just financial control and speculation. It would be better off to play dump and slow and build itself up and then strike then what they are doing now especially with its most safe border with Canada! and its precarious border with Mexico which if it goes out of control risk of real guerrilla warfare something American people do not know but may make them truly understand why people immigrate?
Comprador elites have much to do with global dollar dependency — it’s a useful flight capital tool when their fellow citizens tire of being exploited …
Let’s wait to see if he actually eliminates the tariffs before making pronouncements like this.
The price of oil movement tells you what you need to know.
This makes sense for Mexico but what about Canada? More migrants and drugs cross from the US to Canada than the other way round. What concession is Trump trying to get out of them?
I wonder if there isn’t also a long-term desire to have more manufacturing done in the US, and so he’s giving notice to companies thinking about investing in operations to serve the North American market that they may want to consider the US, as opposed to Canada or Mexico, for their new factory.
I think in case of Canada most right minded, right wing people just want to beat the snot out of them, nothing to do with trade, demands etc.
They are just that obnoxious, sanctimonious moron you just can’t stand the sight of.
More terrorists cross from Canada to the US than from Mexico.
At least there will be no tariffs on Britain. We no longer make anything. But it is delicious to watch the discombobulation of the British Right. Empire Loyalism or “the Special Relationship”. They cannot have both. Meanwhile, Keir Starmer is right that Britain does not need to chose between being a satellite of the United States and being a vassal of the European Union. He is just wrong to assume that we should be both. We should be neither. As should Canada.
Between the 1860s and the 1970s, the Hamiltonian American School, as expanded by the American System of Henry Clay, worked to make the United States the world’s largest economy, with the world’s highest standard of living, culminating in the glorious achievements of the New Deal, which in turn made possible the Civil Rights movement. But Donald Trump understands none of that. The best that can be said of him is that at least he is not an avowed enemy of such things, as Justin Trudeau and Mark Carney are.
You think that Justin Trudeau and Mark Carney and enemies of civil rights?
What are you blabbering about?
the glorious achievements of the New Deal
that continue to plague us to this day. Social security, the NRA (national recovery act), etc paved the road to social democracy that has created the welfare state that is driving us to bankruptcy. Our population is hooked on the free money of Social Security, Medicare, Medicaid like the most miserable junkies.
This analysis is missing a mention of the US-Mexico-Canada trade treaty signed by Trump 1. These tariffs would be a violation of that treaty. They would send a message to the world that the US doesn’t honour its legally binding commitments. That is a signal to the international community not to trust the US. Short term bullying will have longer term consequences.
And Canada spends less than half the amount they said they would on military.
What great allies.
Just for kicks why don’t you tell us exactly what Canada spends on it’s military? Because I’m just certain that you didn’t just get a stupid soundbite from Trump or one his sycophants and barfed it back up here.
You wouldn’t do that, would ya Bret!!!
Laugh, well in Canada it’s well known. We don’t need trump to tell us what even the military is willing to say in the press.
Yet here you are, still fumbling around in the dark, unable to answer even the simplest question!
Google is your friend. At least you have one.
Poor, and no doubt embarrassed, attempt to justify.
Virtually all of what Canada has done was announced in December, and most of what Mexico done also already committed. Interestingly we’ll see what Trump does to reduce the southern transit of purchased weaponry to the Cartels. Could have targeted that in his first term and didn’t as would mean further gun controls.
He’s shown his hand and then blinked. The ‘art of the deal’ my posterior. Others know he now blinks quickly. It’s all performative and ‘distractive’ like so much else. Red meat for the base whilst he and allies enrich themselves.
Agreed, I fail to see what has actually been achieved. A few disinterested troops at well advertised points at the border will do nothing to stem the flow of drugs. If Trump was serious he’d deploy his own much more highly armed forces along border rather than relying on the Mexicans.
However the amount of trust lost in these threats to his allies will be hard to quantify. If he’s willing to blackmail friendly nations then why would they continue to side with the Americans over the Chinese in any new Cold War type scenario?
US troops are prohibited from making arrests, so Trump has sent thousands of troops to SUPPORT the local ICE and state agents.
Read, learn, don’t be stupid.
Announced in December…. So nothing to do with tariffs….. Got it….
Here is the BBC headline from 18 December.
‘Canada announces new border rules following Trump tariff threat’
‘The new plan appears to correspond to the concerns publicly disclosed by Trump in recent weeks: the flow of fentanyl and undocumented immigrants into the US.’
So why announce the tariffs on Saturday if it wasn’t performative?
And besides c1% of fentanyl flows are believed to be from Canada to US. and border is 5.5k miles long.
He had a better argument with Mexico but there he’d been reluctant to acknowledge the US essentially arming the Cartels with it’s self defeating Gun laws. He’ll do next to nothing about this.
It’s all distraction strategy whilst he and Musk et al cream it.
Mexico will move 10,000 home guard to the border…again. This is utterly meaningless. Canada said it would do the things it already said it would do.
This is a classic case of “full of sound and fury, signifying nothing.”
Seriously, what has all this posturing and flip flopping achieved? Does anyone seriously think this will have any impact on opiate addiction in the USA?
It also looks like delaying the tariffs to March was the original plan, but somebody leaked this and they had to pretend they were going ahead. Only for them to immediately delayed to March….
Uncertainty in the market. That was the goal all along.
But did Mexico make any concessions? Had they previously refused to send troops to the border? Are the 10,000 infact already at the border, part of a reputed force of 15,000?
Here in Canada, Trump is suddenly the only person nearly as unpopular as Justin Trudeau (not that he has ever had a large approval rating north of the US). But here’s the thing: he has no responsibility to Canada, or the Brits or certainly China or Mexico. He’s firmly and intelligently defending his own nation, and if we all had the same the entire West would be far better off.
So, it looks like fat boy has backed down on his idiocies at both his southern and northern border. He really is the worst dealmaker in history. If he has anything to do with it America will go the way of all his other business ventures – bankrupt.
“fat boy has backed down”
As well as the 10,000 Mexican troops now assigned to sort out the drug and people smuggling cartels Canada has now agreed to a ” $1.3 billion border plan – reinforcing the border with new choppers, technology and personnel, enhanced coordination with our American partners, and increased resources to stop the flow of fentanyl. Nearly 10,000 frontline personnel are and will be working on protecting the border.
“In addition, Canada is making new commitments to appoint a Fentanyl Czar, we will list cartels as terrorists, ensure 24/7 eyes on the border, launch a Canada-US Joint Strike Force to combat organized crime, fentanyl and money laundering. I have also signed a new intelligence directive on organized crime and fentanyl and we will be backing it with $200 million.”
Fat boy one, CS nil.
It looks like it’s a reassignment of existing expenditure in both Mexico and Canada. So revised ‘marketing’ as much as anything. Trudeau announced the Canadian measures in December, so Trump’s pronouncements on Saturday entirely performative. Probably planned to back down come Monday and thus minimise Wall st impact. The Czar thing a bit of a joke of course. How easily Trump paid off, but perhaps more importantly how easily his supporters lap up nonsense red meat.
As regards Mexico – the ‘deal’ includes Trump now taking measures to reduce ability of Cartels to buy weapons in US, (in the States with loosest Gun Laws) and then just drive them across the Rio Grande. Let’s see what Trump does about that. And remember for the moment he’s not got through Congress the Reconciliation Bill that will invest much more in Border control, nor will he prioritise that in front of the Billionaire’s tax-cuts if it comes to affordability problem.
You’re being played. I suspect you know that but alot of sunk-cost fallacy in Trump.
David, you really didn’t know that everything that was announced by Mexico and Canada had already been promised to Biden? Trump got nothing new.
That’s so cute!