The unintended consequence of Trump's tariffs that will affect us all

Independent

04-03-2025

Trump 2.0 is different. He is better organised and has his people in place to deliver his agenda – including all his most destructive impulses. Hence the imposition of tariffs on Canada and Mexico (25 per cent) after a month's suspension with an additional levy on China (bringing the total to 20 per cent).
These are paid by importers at ports and the border. The theory is the that levies protect domestic industries. In practice, it's not so simple. Is it ever?
Let's take Canada. The duties imposed on its produce don't just hit its most famous export – the maple syrup represented on the famous flag – they also apply to energy.
Canada supplies roughly 58 per cent of energy-hungry America 's hydrocarbon imports and 60 per cent of its crude oil imports. Canada is a good supplier for the US because it is next door and is (was) a reliable ally. The inevitable result of this is that America's energy will become more expensive.
Businesses have two choices when faced with increased costs: they can absorb them, or they can pass on the increase to the end consumer – the average American. Their preferred option will be the latter.
This doesn't mean that, for example, the price of the Canadian maple syrup Americans buy will shoot up by 25 per cent. But it will likely shoot up.
Rising energy costs, meanwhile, have a nasty habit of stoking inflation across an economy. Britons, in hock to the global wholesale natural gas market for electricity, are keenly aware of this fact.
Then there is lumber: Canada's is in high demand in those parts of the US which are rebuilding after natural catastrophes. This is not a commodity whose price you want to increase..
A big reason for the success of Trump and the Republicans at the US ballot box was the impact of inflation on the American consumer. Singled out for particular criticism was Joe Biden's Inflation Reduction Act. This huge piece of legislation pumped billions of dollars into clean energy. It also included Affordable Care Act subsidies and expanded America's Inland Revenue Service to improve tax collection.
But it didn't actually do much to reverse inflation, at least in the short-term. Some critics argued that such a fiscal expansion did the opposite.
There is no debate about tariffs. They do increase inflation and we all know what central banks do when confronted with that: they hike interest rates, hurting both domestic and business borrowers and slowing economic growth.
America's reputation as a good trade partner will also take a knock, with trade flows potentially being diverted away from it. There is some evidence that this happened last time around.
It is true that while tariffs can protect some industries, they damage others – not just those that import raw materials from the victims but exporters, too, because of the inevitable response. Affected countries tend to hit back with tariffs of their own, as they have done in this case.
A global trade war is the last thing a world economy, battered by a series of black swan events, needs. But here it is, sparking a global stock market rout.
Trump's secondary aim with the policy is to raise revenues. America's debt now sits at 124 per cent of GDP. By comparison, Britain's is just over 95 per cent.
Last week saw a massive spending bill passing the US House on party lines, with the lone exception of Thomas Massie of Kentucky. The Republican congressman is a prominent fiscal hawk.
For all Elon Musk's posturing at the Department of Government Efficiency (DOGE), America is not cutting enough to avoid the legislation vastly increasing its debt pile.
There could scarcely be a more destructive way of raising revenues to tackle that problem than imposing tariffs.