Issue No. 4

Trump Wants to Constrain China. His North American Partners Can Help That Cause, So Why Bash Them?

On Feb. 21, President Trump issued a new presidential memorandum titled, “American First Investment Policy.” It took dead aim on China.



The memo, which amounts to a significant policy directive, began by stating that “welcoming foreign investment and strengthening the United States’ world-leading private and public capital markets will be a key part of America’s Golden Age.” But not all investment is “in the national interest.” The memo continued:

Certain foreign adversaries, including the People’s Republic of China (PRC), systematically direct and facilitate investment in United States companies and assets to obtain cutting-edge technologies, intellectual property, and leverage in strategic industries.

The President directed department secretaries “to use all necessary legal instruments…to restrict PRC-affiliated persons from investing in United States technology, critical infrastructure, healthcare, agriculture, energy, raw materials, or other strategic sectors. My Administration will protect United States farmland and real estate near sensitive facilities.”

These steps, combined with the 10% tariffs on Chinese imports announced earlier in February, are part of the Trump Administration’s strategy of constraining China economically and attempting to reduce dependence on Chinese goods and investment. But this is a fight that can’t be won without allies, and those allies are right here in North America.

China has been enormously successfully in building a powerful web of trading connections. Look the visualization. It shows countries where the U.S. is the number-one trading partner in blue and where China is number-one in red. In 2020, the U.S. dominated the globe. Today, China does. It is number-one in all of Asia, all of Africa, and nearly all of South America. In fact, the U.S. foothold extends only to Western Europe, the northern part of South America – and, importantly, North America.

“The administration,” reported Bloomberg, “also called on Mexican officials to place their own levies on Chinese imports – a move that comes after some firms from the Asian nation shifted production to the US neighbor to avoid duties the Republican enacted in his first term.”

In fact, Mexico has already applied strong measures against Chinese transshipments, including high tariffs on steel from any country without a free-trade agreement (such as China) and a rule that all steel must be “melted and poured” in Mexico in order to take advantage of free passage to the United States. Mexico is reported to be reassessing its entire economic relationship with China.

What the memorandum neglects to say is that dozens of Chinese companies operate in the U.S. and enjoy the benefits of the USMCA for their exports to countries including Mexico.

But if the U.S. truly wants to loosen ties to China, it must bolster its supply chains throughout Mexico and Canada. Those chains are shorter and more secure, and they connect friends, not adversaries.

Unfortunately, the White House appears to be on course to do the opposite, threatening 25% tariffs on all goods from Canada and Mexico to begin on March 4 and, in a separate ultimatum, 25% tariffs on steel and aluminum on March 12. Either set of duties will undoubtedly ignite a trade war and destroy the U.S.-Mexico-Canada Agreement (USMCA) that President Trump initiated and, just five years ago, called “the fairest, most balanced, and beneficial trade agreement we have ever signed into law.”

The best way – in fact, the only way – to counter China effectively is to encourage Mexico, especially, to become the source of manufacturing components and goods that China now provides. Otherwise, the entire policy falls, no matter how many executive memos and orders the White House issues.

Reports are emerging that talks are going well between U.S. and Mexican officials to avoid the 25% general tariffs that Trump agreed on Feb. 3 to pause for a month. Mexico’s president, Claudia Sheinbaum, asked on Feb. 24 about a report that the U.S. was pushing Mexico to impose duties on Chinese imports, said it was important to "prioritize those places where you have trade agreements versus others where you do not have them."

Nevertheless, later on Feb. 24, President Trump said that tariffs on imports from Mexico and Canada "will go forward" on March 4 when the 30-day reprieve expires. “The news, which came in the final 40 minutes of trading,…dragged the S&P 500 lower,” reported Investor’s Business Daily.

Trump made the statement at a White House news conference, saying that the U.S. has "been taken advantage of" by trading partners, but "we're going to make up a lot of territory.”

Two days later, the President said that the new deadline for North American tariffs would be April 2. Bloomberg headlined that the pronouncement sowed confusion.



Meanwhile, Mexico and Canada are intensifying efforts to satisfy Trump’s concerns about border issues involving fentanyl and immigration. Those were the original reasons given for tariffs that were going to go into effect in early February but were postponed by a month – or now, perhaps an additional month.

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Consumers and Businesses in U.S. Already Feel the Pain of Impending Tariffs

As the clock ticks toward the deadlines President Trump set for imposing tariffs on imports from Canada and Mexico, U.S. consumers and businesses are already feeling the pain.

A Reuters piece on Feb. 24 noted that the U.S. “business activity index fell to a 17-month low in February.” And, with tariff action still weeks away, “the network of producers and builders that rely on the metals to make their goods. And not in a good way.” Said the article:

The price of the steel Glen Calder buys for his small machinery factory in South Carolina has spiked over 15% in the last two weeks, while Brian Nelson’s factory halfway across the country in Illinois can’t get its suppliers to quote him current prices at all.

Hot rolled coil prices in the Midwest rose 12% in just two weeks. They have climbed 20% since Trump took office, according to data provider Fastmarkets. Nucor, the top U.S. steel producer has raised its hot-rolled coil prices four times since the start of the year. A Bain & Co. survey found that 40% of chief operating officers and other top executives are anticipating double-digit increases in their input costs because of the tariffs.

An academic survey of 13,500 consumers found that many of them expect tariffs to be higher than Trump has so far threatened. “On average, survey respondents predicted the new administration would impose tariffs of 35 percent on Canada, 35 percent on European countries and 42 percent on Mexico. But the largest expected tariff by far is for China, with Americans predicting the Trump administration will apply a 50 percent tariff on average,” wrote the researchers, University of Texas’s Olivier Coibion, University of California at Berkeley’s Yuriy Gorodnichenko and University of Chicago Booth’s Michael Weber.

These fears have lowered consumer sentiment, caused Walmart to lower profit estimates, and led to the kind of early buying and hoarding that push up prices in advance of tariffs themselves. A report on regional businesses by the Federal Reserve Bank of Minneapolis, headlined, “Hiring slows as businesses continue to face high costs,” cited the depressive effects of prospective tariffs, which have created “concerns about future input costs and demand.”

Said a North Dakota alcoholic beverage retailer, “We are anxious about any possible tariffs. We significantly felt the impacts of the last round of tariffs in 2018 [and] 2019. We tried to stock up in advance of price increases to be competitive.”

In its latest Economic Conditions Outlook, McKinsey & Co. reported that “changes in trade policy and/or relationships” has soared as a potential risk factor. It was cited by one-quarter of respondents in September, ranking fourth among five sectors. By December, trade policy was second, with about 50%, second only to “geopolitical instability and/or conflicts.”



Despite the promise of tax cuts, the Dow Jones Industrial Average has fallen between the day after the election and the market’s close on Feb. 26 – to a large degree because of tariff concerns, analysts say. And all this before any significant tariffs have been enacted – only those extra 10% duties on China.

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U.S. Homebuilders See Costs Rise and Affordability Fall With Imports Threatened

Homebuilders are especially worried. “More than 70% of the imports of two essential materials that homebuilders rely on — softwood lumber and gypsum (used for drywall) — come from Canada and Mexico, respectively,” said the chairman of the National Association of Homebuilders (NAHB), Carl Harris, in a press release.

“Tariffs on lumber and other building materials increase the cost of construction and discourage new development, and consumers end up paying for the tariffs in the form of higher home prices.”

Chicago Agent, a real estate industry magazine, reported that, as of January, the cost of the lumber package for a typical single-family home was about $30,000 — $13,000 more than in April 2020. Price spikes like these are especially burdensome for first-time buyers. A year ago, 36% of new homes nationwide were priced below $300,000; now, that share is just 21%. Agents and homebuilders alike are well aware of the ongoing affordability crisis.”

All three components of the NAHB/Wells Fargo Housing Market Index (HMI) — sales conditions, prospective buyer traffic and sales expectations — fell in February.

“Notably,” said Chicago Agent, “this was the largest one-month decline since the early months of the pandemic. It comes shortly after U.S. housing starts dropped 9.8% month over month in January, following a post-election builder confidence bump in December.

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What Are Tariffs Supposed to Do?

In all the discussion of tariffs, a big question needs answering: What is America’s goal? Not just for steel but for tariffs in general. What are tariffs supposed to do?

The White House has said tariffs offer several benefits:

• Rebuilding the U.S. industrial base.

• Raising revenues.

• Simple fairness. “The world is sticking it to us”: Peter Navarro. Quote Milton Friedman.

• Gaining other objectives such as stopping the flow of illegal drugs and immigrants.

As we showed in our last newsletter, tariffs won’t help U.S. manufacturing, employment, or the economy at large. To the contrary. Extensive research, including an academic paper by two Federal Reserve Board economists, into the experience of 2018 demonstrated that, while profits of metals companies ticked up, employment did not – and businesses and consumers that use steel and aluminum were harmed because they had to pay higher prices, both for imported and domestic goods.

Increased tariffs on U.S. imports inevitably provoke a foreign response, harming U.S. exporters in such sectors as agriculture.

As Matthew Rooney of the George W. Bush Institute wrote during the 2018 round of tariffs:

After 1945, the United States used its unparalleled power to build a global system that reduced tariffs over time and began to create a level regulatory playing field. The result was the greatest increase in wealth in human history. Across the world, wealthy countries became wealthier and poor countries saw their economies grow and the emergence of a middle class.

Successive waves of innovation – jet aircraft, space travel, micro-circuitry, cellular telephony, information technology – spread manufacturing across the world. The wealthy countries – including the United States – produced growing job opportunities even as they lost segments of the manufacturing value chain to poorer countries. 



What about revenues? According to the Congressional Research Service, the U.S. collected $77 billion in tariffs in fiscal 2024. Tariffs are such a thin slice of total Treasury receipts that they barely show up in this graph:

It would take an enormous increase in tariffs to make a dent on the federal deficit. Here’s a chart of recent deficits from the Bipartisan Policy Center:

In 2024, the deficit was $1.8 trillion. Even if we increased tariffs by a factor of five, they would make only a small dent in the overall deficit. More important, tariffs are paid, not by the foreign company sending goods to the U.S., but by the U.S. importer – either a business or a consumer.

An animated explainer in the New York Times on Feb. 12 demonstrated how tariffs on shoes are paid by U.S. consumers. The U.S. already applies a 20% tariff to shoes and, now, an additional 10% tariff on shoes coming from China. That’s a total of $18 to $20 extra that an American pays for the average mid-range shoe.

Matt Priest, president of the Footwear Distributors and Retailers of America, told NBC News:

This is a movie we’ve seen before, and it doesn’t bring jobs back to the U.S., and it does raise costs, so it’s a challenge for us to see the end game or the point.” Priest said he wants to work with the administration to tamp down inflation, We do want to work with the administration to tamp down inflation “but this is not the way to go about doing that.



The graph below, from CRS, shows dramatically how average tariff rates around the world have dropped in the last quarter-century. With the exception of India, all the major global economies have average rates well below 5%. The chart also shows the blip in U.S. rates in 2018-19, when Trump imposed sweeping tariffs on goods ranging from steel to solar panels and washing machines.

As for simple fairness, trade reciprocity is a legitimate goal (see below on William McKinley), and it is enshrined in the USMCA. Raising tariffs on neighbors that have no tariffs on U.S. goods is not simple fairness, but the opposite.



Finally, using tariffs as a cudgel to get what you want in other areas is an example of self-harm. Tariffs on imports hurt the country that imposes the tariffs and the consumers and businesses who pay them. Border issues are significant and require negotiation that should be kept separate from matters of trade. And differences on trade should be resolved through negotiations as well – not punitive duties. North America has the perfect venue: the 2026 USMCA review, which is beginning now.

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The Truth About William McKinley

President Trump continually cites President William McKinley's 1890 tariff hikes as evidence that such duties will cause the U.S. to prosper. "You go back and look at the 1890s, 1880s, McKinley, and you take a look at tariffs, that was when we were proportionately the richest," Trump said.

In 1890, tariff hikes raised the average duties on foreign imports from 38% to nearly 50%. McKinley, a Congressman at the time, pushed for the taxes to protect his state's steelworkers from foreign competition, according to Dartmouth College economics professor Doug Irwin, cited by CBS News.

But, despite their reputation on TV series and in films, the 1890s were hardly boom times. "The U.S. went into a depression in 1893, and we didn't really emerge out of it until the mid-1890s. So in general the 1890s was not a great decade for the U.S. economy," Irwin said.

“Additionally, McKinley's tariff bill raised prices of goods like shoes and clothes, leading to voter backlash that cost Republicans 93 seats in the next election, according to the House of Representatives Office of the Historian,” CBS reported.

"It is unclear why [Trump is] picking on the 1890s as this golden age. It wasn’t considered good times, at least by the people living through it at the time,” Irwin said.

Karl Rove, the political strategist who wrote an acclaimed biography of McKinley, wrote last year in the Wall Street Journal that “McKinley was never a high-tariff man.” Instead, the 25th president advocated reciprocal tariffs – that is, the U.S. and its trading partners should have the same tariff rates, the principle that underlies the USMCA. Raising U.S. tariffs on steel to 25% is not reciprocity when Mexico’s tariffs on U.S. steel (which, by the way, enjoys a surplus with Mexico) are zero.

Rove wrote:

[McKinley’s] most powerful advocacy came at the Pan-American Exposition in Buffalo on Sept. 5, 1901. Addressing representatives of trading partners and a large crowd, the president heralded global modernization, saying “isolation is no longer possible or desirable.” America’s “capacity to produce has developed so enormously,” he declared, that we can’t entertain the “fancied security that we can forever sell everything and buy little or nothing.” He called for “a broad and enlightened policy” of reciprocal agreements, “essential to the continued and healthful growth of our export trade.” His words were warmly received.

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Fallout From Tariff Threats Is Broad

The threatened tariffs against Mexico and Canada aren’t just about the price of goods traveling across borders. They are about the relationship among the nations of North America. If a trade war develops, animosity will replace cooperation, and we can expect Canada and Mexico to look for new friends and new markets, disrupting the current beneficial supply chain and national security relationships.

We are already seeing some evidence even before tariffs are applied. Bloomberg reported on Feb. 24 that the large Canadian trucking company, TFI International, has “reversed its decision to move its legal headquarters to the U.S., saying it was backing down after shareholders expressed opposition to the idea.”

TFI is typical of companies that have blossomed under NAFTA and USMCA. About 70% of its operations are in the U.S. after what Bloomberg calls “an acquisition spree.” Last year, it bought Daseke of Texas for $1.1 billion.

At the root of opposition, according to the Bloomberg article, is “anger and dismay over US President Donald Trump’s trade policy, which aims to dominate the global race for investment capital by imposing tariffs on products provided by foreign companies.” The article continued:



Trump’s tariffs and repeated taunts about turning Canada into the 51st US state have prompted a patriotic fervor in Canada over the past few weeks, with Canadian consumers shunning US labels in favor of domestic products. Kraft Heinz Co. even took out television advertising on the Canadian broadcast of the Super Bowl to highlight its Canadian-sourced products. The ad used the tagline: “Made by Canadians. For Canadians."