Issue No. 2

In this issue:

• After issuing a thoughtful trade policy memorandum with no tariff directives, President Trump said he would impose 25% duties on North American partners by Feb. 1.

• What the ‘America First Trade Policy’ memo from the White House actually says.

• Will Trump impose heavy tariffs on Mexico and Canada? Experts explain.

• Is Trump’s success against Colombia a portent?

• The obsession with Canada: how to understand it.

• PANAP chairman, a former State Department official, reminds Trump of his USMCA achievement and urges him not to kill it by starting a trade war.

• Mexico and the European Union, both concerned about threatened U.S. tariffs, have just made a new free-trade agreement.

• Mexico’s steel association uses Census data to rebut attacks by U.S. manufacturers.

• A CEO with manufacturing facilities on both sides of the border calls for further U.S.-Mexican integration.

What Happens on February First?

President Trump sowed confusion when he issued a detailed statement on Inauguration Day of his new administration’s trade policy without reference to North American tariffs and then, a few minutes later, said he would impose hefty duties on Mexico and Canada in less than two weeks.

“We’re thinking in terms of 25% on Mexico and Canada, because they’re allowing vast numbers of people” across the border, Trump said in response to questions from reporters in the Oval Office on Jan 20. “I think we’ll do it Feb. 1.

Clearly, reported the Financial Post, “Trump hasn’t tempered his public enthusiasm for imposing sweeping tariffs to raise revenue, reshape trade flows and as leverage for other foreign policy goals. 

In addition, on Jan. 21, as Bloomberg reported, the new President said that “he’s considering a 10% tariff on all Chinese imports— probably as soon as Feb. 1—in response to the flow of fentanyl from the country to Mexico and Canada…. Trump also repeated threats of hefty levies on Canada and Mexico, which bumped up the price of oil, as well as the European Union.”

Separately, Bloomberg reported, “Any volley of new border taxes threatens to set off a trade war among the signatories of the US-Mexico-Canada Agreement, the successor to Nafta negotiated at Trump’s assistance during his first term. The pact governed the flow of $1.8 trillion in goods and services.”

As we noted in our last newsletter, the real trade problem for the U.S. is unfair practices by China, and it is the same problem that Canada and, especially, Mexico have. Igniting a North American trade war will harm the best U.S. economic allies – critical to shorter, more reliable supply chains -- in the struggle with China.

White House Issues ‘America First Trade Policy’ Without Specific Tariff Orders

Why the confused messages? We will discuss possible answers below, but first let’s look at the presidential action issued on Inauguration Day titled, “America First Trade Policy.” In the form of a long memorandum, the document laid out the President’s philosophy and strategy and then issued orders – not for tariffs but mainly for studies -- to four Cabinet Secretaries and five White House officials.

The memo begins by asserting that during the first term, the Trump Administration pursued trade and economic policies that “spurred an American revitalization marked by stable supply chains, massive economic growth, historically low inflation, a substantial increase in real wages and real median household wealth, and a path toward eliminating destructive trade deficits.” In addition, the administration “treated trade policy as a critical component to national security and reduced our Nation’s dependence on other countries to meet our key security needs.”

With that in mind, the President on Jan. 20 ordered the Secretaries of Commerce and Treasury and the U.S. Trade Representative (USTR)…

to investigate the causes of our country’s large and persistent annual trade deficits in goods, as well as the economic and national security implications and risks resulting from such deficits, and recommend appropriate measures, such as a global supplemental tariff or other policies, to remedy such deficits.

He wants the report on his desk by April 1.

President Trump talks frequency about trade deficits in the context of individual nations “taking advantage” of the U.S., even though most economists attribute deficits to macro-economic causes, such as a low savings rate, high levels of personal consumption and government spending deficits.

This focus on trade deficits, however, is ominous for Mexico and Canada. Mexico is the number-one purchaser of U.S. exports, but it ran a bilateral trade surplus of about $170 billion in 2024 (the December data is not in yet, so we are interpolating). As a naked number, it’s meaningless. If government officials want to know the true impact of trade with Mexico, they will need to ask questions that are not listed in the memorandum.

For example, what is the U.S. content of exports from Mexico to the U.S.? (Answer: a lot, especially compared with exports from other countries like China.) Another question is what proportion of exports from Mexico come from U.S. companies with factories in Mexico, including Ford and General Motors, which rely on lower-cost components from the reliable supply chain to keep people employed in the United States. Another question is how much U.S. consumers save as a result of that supply chain.

The U.S. agencies should also be instructed to study the impact on the U.S. economy – and on the flow of out-of-work migrants – if tariffs are placed on Mexico, touching off a trade war.

Canada in 2024 ran a trade surplus in goods of about $60 billion with the United States. According to a study by TD Economics, “the U.S.-Canada trade deficit is mainly due to energy. If energy exports are excluded, the U.S. actually has a trade surplus with Canada of around $60 billion.” Crude oil accounted for more than one-fourth of Canadian exports to the U.S.

In what appears to be a contradictory move, President Trump also announced he will resuscitate the Keystone XL Pipleline, which brings oil from Alberta, Canada, to Nebraska and eventually to the Gulf of Mexico. That plan will increase Canada’s exports to the U.S. and, it would appear, widen Canada’s trade surplus with the United States.



Even without Keystone XL, Canadian exports of oil and gas to the U.S. currently amount to $132 billion a year. “It’s highly unlikely the Trump administration could replace that oil with American product fast enough to avoid sticker shock at gas stations,” wrote Elizabeth Hicks and Sabine El-Chidiac of the Consumer Choice Center in a Jan. 20 opinion piece in The Hill. A study by Goldman Sachs last year found “significant consequences” for consumers if tariffs are applied to Canadian energy. 

“North America as a trading bloc is uniquely positioned to thrive during the Trump administration,” they write, “but instead of promoting growth and lower costs for Americans, framing a destructive trade war is all that’s being discussed.” They cite the “sophisticated supply chain integration” in North America, which “has resulted in lower prices for consumers, especially when it comes to automobiles.”

The Trump Administration’s trade policy document also calls for the USTR to “commence the public consultation process…with respect to the United States-Mexico-Canada Agreement (USMCA) in preparation for the July 2026 review of the USMCA.” The USTR is also ordered to “assess the impact of the USMCA on American workers, farmers, ranchers, service providers, and other businesses and make recommendations regarding the United States’ participation in the agreement.”

The strategy clearly recognizes that the USMCA review is the right venue to consider any changes to the trade relationship of the three North American countries.

In the very last directive, however, the President asks the Secretary of Commerce and the Secretary of Homeland Security to “assess the unlawful migration and fentanyl flows from Canada, Mexico, the PRC, and any other relevant jurisdictions and recommend appropriate trade and national security measures to resolve that emergency.” That could mean using tariffs, as the President later said, to pressure Canada and Mexico to bend to his will on these issues.

In general, though, the American First Trade Policy document -- while it omits some important topics, as we noted above -- is thoughtful and requires studies, data and analysis rather than impetuous action that could imperil the U.S. economy and those of Mexico and Canada. The document makes no threats of tariffs on North American imports beyond the comments about deficits, drugs and immigration.

How Real Is Threat of 25% Tariffs? Experts Weigh In.

As we noted in our last newsletter, shortly after he was elected, Donald Trump wrote on Truth Social:

On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders.

That didn’t happen, but, clearly, the President still believes that heavy tariffs will earn the U.S. revenues, eliminate trade deficits, and pressure Canada and Mexico into solving U.S. drug and immigration problems.

In an article on Jan. 22, Newsweek’s Shane Croucher interviewed several economic experts on why the promised tariff blitz has not occurred.

Anne Krueger, a senior Ffellow at the School of Advanced International Studies, Johns Hopkins University, and an economist at Stanford, answered that “the delay is almost surely the result of pressures from domestic interests (including U.S. companies with factories abroad who supply U.S. firms).” She added:

Putting in place the administration of that sort of thing would be tricky and take time. There would also likely be legal issues. Regrettably, I fear that he will impose tariffs, but perhaps with some waivers and some further delays.

Penny Goldberg, a professor of economics at Yale and former chief economist at the World Bank, said she viewed “the delay as a positive sign that economic rationality might ultimately prevail. The postponement likely reflects internal disagreements among the president's advisers regarding both the justification and scope of the proposed tariffs.”

She explained, “It seems a faction within the administration recognizes that the extraordinarily high tariffs touted during the presidential campaign could harm the U.S. economy and prove politically damaging.”

Kyle Handley, director of the Center for Commerce and Diplomacy at the University of California at San Diego, said that “the tariff threats are real.” The delay, he said, was caused by a recognition that “announcing new tariffs on day one of the administration would have been disruptive and chaotic as many goods are already in transit. The new administration is simply laying the groundwork for Trump's authority to impose new tariffs under existing laws.”

Handley said that Trump “is likely to make heavy use of emergency economic powers and national security rationales for new trade restrictions.”

Gene Grossman, an economics professor at Princeton who studies the relationship between trade and growth, told Newsweek that tariffs are bound to add to inflation but that he expects Trump “will follow through with some sort of tariffs, perhaps with exceptions for his major supporters. He seems so convinced that tariffs are the answer to everything, that a few sane voices will not win the day.”

He also believes, however, that tariffs will be disruptive and painful for U.S. businesses and consumers. If the “effects are as pronounced as I expect that to be, there may well be a change of course before too long.”

After a campaign in which he promised far bigger and broader levies,” said the Financial Post, “the fact that he didn’t actually impose any was enough to allay some critics’ worst fears about his plans, with many reading the latest threats as just negotiating ploys. At least for now.”

Still, the short-term studies that Trump ordered in his trade directive of Jan. 20 could lead to a revolution in the trade regime that has governed U.S. relations with economic partners since the end of World War II – especially if trade deficits with individual countries becomes the main metric for policy.

“They’re essentially setting the stage for future tariff actions,” said Scott Lincicome, vice president at the Cato Institute. “All this kind of sigh of relief,” he added, “strikes me as a bit premature.”

Perhaps. But Trump’s economic advisors are fully aware of the dangers of tariffs. As Politico reported in December, “Hedge fund manager Scott Bessent, Trump’s pick for Treasury, told his investors early in 2024 that tariffs would be inflationary and ‘would strengthen the dollar — hardly a good starting point for a US industrial renaissance.’” Added Politico’s reporter Sam Sutton:

Howard Lutnick, his choice to head the Commerce Department, has described the threatened import taxes as merely a “bargaining chip.” And Kevin Hassett, who will lead Trump’s National Economic Council, has cautioned that “Congress would need to be involved” in imposing universal tariffs. 

Hassett, the top assistant to the President for economic affairs, spent 20 years at the American Enterprise Institute (AEI) and then moved to the Hoover Institution, both staunch conservative supporters of free trade. Hassett advised the George W. Bush, John McCain and Mitt Romney presidential campaigns, and Sutton notes that Hassett “has previously written that he ‘didn’t have the DNA of a Trump advisor,’ having been a free-trade devotee before joining Trump’s first administration to lead the Council of Economic Advisers in 2017.”

Still, any supposed moderates “may curb him at the margins but, ultimately, he’s a strong-headed boss,” said Mark Sobel, a former Treasury official who is now the U.S. chair at the Official Monetary and Financial Institutions Forum. “He’s going to do what he wants to do.”

If so, he will be bucking the vast majority of experts in the field. As the late Nobel Prize winner and conservative icon Milton Friedman (in concert with his wife Rose) wrote in 1987:

Economists often do disagree, but that has not been true with respect to international trade. Ever since Adam Smith there has been virtual unanimity among economists, whatever their ideological position on other issues, that international free trade is in the best interests of trading countries and of the world.

In a Jan. 21 editorial, The Economist magazine began with an anecdote about President Franklin D. Roosevelt surveying the wreckage of the Great Depression:

He pointed to one of its causes: sky-high tariffs had put America on the ‘road to ruin” by inviting retaliation and suffocating investment. It was a painful lesson, and it took decades of sustained global effort, led by America, to bring tariffs down and let commerce flourish. From our vantage in 2025 the perils of protectionism should still be abundantly clear. Tragically, if Donald Trump gets his way, America risks repeating the errors of the past.

The Economist added, “Make no mistake: the man who declared tariff to be the most beautiful word in the dictionary is determined to ratchet up protection. He sees tariffs as a simple tool to achieve multiple objectives: shrink America’s trade deficit, rebuild its manufacturing might and generate a gusher of revenue for the government. On every count he is wrong.”

The magazine pointed out that “manufacturing as a share of American employment has fallen since Mr Trump’s first tariffs went into effect.” Yes, steel and aluminum companies increased revenues. “But that gain came at the expense of the thousands of downstream companies that suffered from higher input costs.

“Put another way, America protected the parts of its economy that were struggling in the global marketplace by imposing burdens on its most competitive industries. That is hardly a recipe for a manufacturing renaissance."

Colombia Relents

On Jan. 26, the President of Colombia, Gustavo Petro, turned away two planes carrying deportees from the United States. Petro claimed that by transporting the deportees on military planes, the U.S. was treating them in an inhumane fashion.

President Trump immediately responded on Truth Social, saying that he had directed retaliatory measures, including “emergency 25% tariffs on all goods coming into the United States. In one week, the 25% tariffs will be raised to 50%” and banking sanctions.

“Mr. Petro hit back on social media,” reported the New York Times.” In one post, he announced retaliatory tariffs of 25 percent on U.S. imports to Colombia; in another, longer post, he said those tariffs would hit 50 percent.”

But by Sunday night, Petro relented. The White House press secretary, Karoline Leavitt, said in a statement that the "Government of Colombia has agreed to all of President Trump's terms, including the unrestricted acceptance of all illegal aliens from Colombia returned from the United States, including on U.S. military aircraft, without limitation or delay."

As a result, the tariffs and sanctions Mr. Trump had threatened would be “held in reserve.”

What does this affair portend for tariff threats in North America? Colombia does run a surplus with the U.S. but it is a minor trading partner. According to the latest data from USTR, two-way trade between the countries totals just $53 billion, compared with about $800 billion each for Mexico and Canada.

Colombia is a significant importer of U.S. soybeans and soy meal, but it pales in comparison to Mexico as a buyer of U.S. farm goods. Midwest farmers would be marginally harmed by a trade war with Colombia, and the price of cut flowers and coffee, which are key Colombian exports, would undoubtedly rise in the United States.

Trump’s success in getting Petro to back down may encourage him to ratchet up threats against Mexico and Canada or even impose tariffs quickly, but the comparison is a weak one. Retaliation by Colombia would have little effect on the U.S. economy. Retaliation by Mexico and Canada combined would be 30 times as powerful.

An Obsession With Canada

Canada, even more than Mexico, appears to be an obsession of the new president. In a Yahoo Finance piece on Jan. 22, reporter Ben Werschkul asked, “Why is Trump so focused on America’s neighbor to the north?”

“Canada is a very bad abuser,” Trump said on his first day in office. “Canada very much so,” he added of the country’s supposed abuses on day two. In fact, Canada is among the top two buyers of U.S. goods, with Mexico, and ran a 2024 trade surplus in goods of only about $60 billion, a figure that has declined in the past two years.

One theory is that Trump is preparing the ground for the 2026 USMCA review – especially around Canadian exports of lumber and dairy products. “But Trump,” writes Werschkul, “has flatly denied this is the reason for his tariff threats, saying of USMCA Tuesday, ‘That has nothing to do with that.’”

Trump is also unhappy with Canada’s actions to prevent illegal immigrants and drugs from coming over the border. "The fentanyl coming through Canada is massive," Trump said this week – though there is no evidence this is true, wrote Werschkul.

Finally, Trump seems to despise Canadian Prime Minister Justin Trudeau, but the Liberal leader has called a snap election this spring, which the Conservatives are almost sure to win (they currently have a 23-point lead).

If Trump goes ahead with 25% tariffs, “the government in Ottawa has already threatened retaliation” and has signaled that U.S. products from orange juice to steel “could be in focus,” said the Yahoo Finance article.

“In the end, both sides would clearly be hurt. A recent analysis from Oxford Economics projects that if Trump goes all in with his 25% blanket tariffs plans, a likely result would be a 3% slump in Canadian GDP – enough to trigger a recession.” As we reported in our last newsletter, the decline in the U.S. would be nearly as great.

A separate Yahoo Finance piece on Jan. 22 quoted the chief investment officer of one of Canada’s largest lenders saying that Trump’s plan to hit the country with a 25% tariff could become reality, but it is unlikely to last long. Bank of Montreal’s Sadiq Adatia said, “When you start any negotiation, you start with a number you don’t think is feasible, just to scare people as a starting point. I don’t’ see 25% sticking.”

Perhaps. But ignoring the actual words coming out of the new President’s mouth has been a losing game.

‘Trump Wants to Blow Up His Biggest Trade Win’

The pain and disruption that tariffs will cause were highlighted in an opinion piece on Jan. 21 in the Dallas Morning News by James K. Glassman, chair of the Project to Advance North American Prosperity (PANAP).

North American tariffs, Glassman wrote, “would raise U.S. manufacturing costs, disrupt supply chains and boost consumer prices. They would also cost the U.S. its two best allies in the economic battle with China.”

Glassman, a former Under Secretary of State and AEI fellow in economics, added, “We’ll have to wait to see what the new president actually does, but one thing we know: U.S. tariffs will provoke global retaliation.” The results of such a trade war are “utterly predictable”: lower growth and bigger bills for U.S. households.

“All of these effects are well-known to economists,” Glassman wrote, “which is one reason that trade economics is such a boring field. Adam Smith had it right 250 years ago.”

The thrust of Glassman’s piece is, as the headline put it, “Trump wants to blow up his biggest trade win,” a reference to USMCA. That agreement has been beneficial to all three parties and has boosted U.S. exports to Mexico by two-thirds since it went into effect in 2019. Tariffs on Canada and Mexico would destroy the entire basis of the deal – the free flow of goods and services in North America -- and lead to a devastating trade war with ever-higher tariffs.

Rather than killing his creation, Glassman wrote, the President should focus his administration’s attention on making it better. And he has the opportunity in the 2026 USMCA review, as he recognized in his trade policy document.

The European Union Makes a Free-Trade Deal With Mexico

Meanwhile, Mexico and the European Union (EU) on Jan. 17 “revived a stalled free trade agreement,” reported Reuters, just “days before the return to the White House of Donald Trump, who has threatened both sides with tariffs.”

The timing is significant. Both parties are clearly concerned about the attitude toward trade of the new U.S. President. They want to smooth the way for their goods and services to flow to other markets.

Reuters continued:

The two parties are seeking to update their trade accord from 2000, which covers only industrial goods, by adding services, government procurement, investment and farm produce. EU proponents say the bloc urgently needs new partners to reduce its reliance on China, particularly for critical raw materials, and to insulate it from Trump tariffs. Last month, it struck a deal with South America's Mercosur bloc.

According to an EU statement, the new deal will… 

increase EU agri-food exports by removing high tariffs, benefitting European farmers; make it easier for EU companies to bid for government contracts, invest and provide services in a variety of sectors in Mexico;… strengthen the protection of climate and labour rights through enhanced cooperation and enforceable commitments; and allow more secure supply of materials critical for the green and digital transitions.

Mexico and the EU are not going to sit idly in the face of U.S. tariff threats. Nor do they want to find themselves over-reliant on China – a lesson of the COVID-19 period. We can expect more changes in global trade relationships.

The Facts About U.S.-Mexican Steel Trade

It’s unfortunate, but some U.S. industries see discussion of tariffs as an opportunity to get their government, like China’s, to give them an advantage over competitors – to the detriment of the U.S. businesses and consumers that purchase their products.

The U.S. steel industry is a prime example of this phenomenon. With the exception of the sector’s leader, Nucor, steel companies have under-invested and suffered in efficiency. In long-term decline, the U.S. produces less steel today than it did in the 1950s.

U.S. Steel, once America’s largest business of any kind, is looking desperately for a buyer. Cleveland-Cliffs and other steel companies are using dirty blast-furnance technology while much of the global industry has moved to electric-arc mini-mills.

The U.S. steel industry and a scattering of allies in Congress have blamed Mexico for its troubles – a claim that does not withstand scrutiny, as a statement Jan. 17 by CANACERO, the Mexican trade association, makes clear.

For example, U.S. steel companies claim a surge in exports by Mexico in recent years, but CANACERO notes that U.S. Census Bureau data shows that for at least the past decade the U.S. has run a surplus in steel trade with Mexico, on average exporting 1.2 million metric tons more annually than Mexico sends to the U.S.

Lately, that U.S. surplus has grown: from 400,000 tons in 2022 to 1.7 million in 2023 to an estimated 2.4 million in 2024. Using Census reports through October, CANACERO projects that the U.S. enjoyed a $4.1 billion steel trade surplus last year. While U.S. export tonnage to Mexico in 2024 rose 10%, Mexican tonnage to the U.S. declined 13%, bringing exports down to the 2015 level.

U.S. steel imports, CANACERO reported, represent fully one-sixth of Mexican consumption. Mexican steel imports, by contrast, represent just one-fiftieth of U.S. consumption.

“The claim that Mexico’s exports are causing U.S. plant closures or layoffs is absolutely unfounded,” said CANACERO. “On the contrary, according to the Centro de Investigacion y Docencia Economicas (CIDE), Mexican exports have 11.8% U.S. content, and U.S. exports to Mexico generate close to 40,000 direct jobs in the United States.”

Another inaccurate claim is that China and other countries are using tactics of circumvention to get their steel into the U.S. tariff free. CANACERO reports that according to the U.S. Steel Import Monitoring System (SIMA), from January to October, exports of steel of Chinese origin to the U.S. through Mexico amounted to just 0.02% of total Mexican exports to the U.S.

By comparison, 83% of steel exports from Mexico to the U.S. have steel of Mexican origin and 2.4% (or more than 100 times Chinese levels) have steel of U.S. origin. This should be no surprise. Mexico has slapped tariffs of up to 50% on steel coming into its country from nations, like China, that lack a free trade agreement. Mexico and the U.S. also worked out a requirement last year that cross-border steel must be “melted and poured” in a USMCA country.

CANACERO concluded, “The best way to address the challenges the USMCA region faces from China and Southeast Asian nations is to continue strengthening North American integration.

‘The Value of Integrated Supply Chains’ Is Lauded by a CEO Who Manufactures on Both Sides of the Border

On Jan. 19, Raul Gutierrez, CEO of Deacero, the large, privately owned Mexican steel producer, addressed an event in Washington sponsored by Bienvenido, a U.S.-based non-profit “dedicated to the advancement of the Hispanic community.

Deacero has manufacturing facilities in both Mexico and the U.S., where its Poplar Bluff, Mo., plant, Mid-Continent Steel & Wire, is the largest domestic nail producer. Gutierrez said the company was planning to expand its “footprint in the U.S. to continue the reshoring of manufacturing into the U.S. and create more jobs.” He added:

I firmly believe in the benefits and opportunities of an integrated North American region, having experienced them firsthand.… It is crucial to understand the value of integrated supply chains and how North American countries can complement each other. For example, exports from Mexico to the U.S. have 40% of U.S. content per dollar, while exports from China to the U.S. have around 4%. This underscores how North American countries can benefit from each other.

He called the relationship between the United States and Mexico “broad, solid, and constantly evolving.” But, he said, “the only way for North America to maintain its global leadership and remain the most competitive region in the world is to build a common agenda against those countries that have benefited from our market while unfairly displacing our industry.”



He reminded the audience that “Mexican and U.S. manufacturing companies are allies and complements to the North American industry. Our real competitors are on the other side of the Pacific Ocean, not on the American continent, so the most effective way to compete globally is to unite as a region."