President Trump threatened Mexico and Canada with 25 per cent tariffs unless they devoted more resources to controlling the flood of fentanyl crossing their borders into the US. That triggered a massive share sell-off and a precipitous collapse in stock prices. Both countries agreed to shore up their border controls. Trump called off the tariffs. By the end of the trading day, share prices were about where they had been when traders were sipping their morning coffee (Starbucks shares up 3 per cent). Kevin Hassett, the estimable head of Trump’s Council of Economic Advisers, had it right when he warned that his boss’ move was not the start of a trade war, but a war on drugs.
Trade Tariffs and Policy Tariffs
The lesson to be learned is that economists must change their focus. We are accustomed to pointing out that tariffs are bad news. They slow growth, burden consumers, upset intricate supply chains. To which the answer now is “So what?” Yes, some tariffs are about trade. Call them trade tariffs. But in Trump’s hands the power of tariffs to deny access to the world’s largest consumer and investment market is a hammer aimed at more nails than mere trade deficits. Call them policy tariffs.
Policy Tariffs Are Powerful Weapons
Given Trump’s plan to use tariffs as a cudgel in economic policy areas having nothing to do with trade, consistency demands that we measure their cost against a wide variety of benefits. We now see that they can add to border security and fewer deaths from fentanyl – 10,000 Mexican troops on our border and Canada adding helicopters to be used by a new Border Czar surely count as benefits to be tallied against any costs associated with the tariff threat.
To the benefits from the threat of tariffs must be added the willingness of countries of origin to accept deported illegal aliens who are charged with often heinous crimes. Venezuelan gang members and other illegal miscreants are being frogmarched onto planes, headed to whence they came, or to Guantanamo, no longer threats to the safety and security of American citizens.
Suppose the threat of tariffs forces Nato members to come up with more cash for Nato and Ukraine, or the EU to lower its 10 per cent tariff on US autos to the 2 per cent level we charge those made in the EU. Suppose tariffs on Russian steel force the use of steel made with cleaner technologies, and that tariffs on imported lithium encourage the development of domestic mining that has fewer lethal consequences than those that seem to accompany foreign mining. Or that the 10 per cent tariff on Chinese imports, on top of those imposed in the last round, does staunch exports of fentanyl precursors to Mexico and the US. Something China’s rather restrained response suggests is within reach of a Trump-Xi negotiation. Or that the desire to keep in America’s good tariff graces persuades Japan to invest in the upgrading of US Steel facilities, and express and interest in purchasing large quantities of LNG, perhaps through a pipeline from Alaska.
Xi Is Ready To Deal
China responded rather mildly, signaling a desire to negotiate, a reflection, perhaps that the last thing Xi needs is any additional barrier to markets desperately needed by Chinese companies struggling with overcapacity and massive losses. It didn’t tariff soybeans, political touch paper for Trump, and restricted exports of only a few rare minerals. Consultants at Capital Economics reckon that China levied fees on about $14 billion worth of US products, compared to the $450 billion of Chinese products covered by Trump’s threatened tariffs. All of which has been taken as a signal of a willingness to deal on a wide range of issues. Trade wars are for men of little vision. Grand policy settlements are for men with their eyes on history, Trump’s on a Nobel Peace Prize, Xi’s on returning China to the center of world affairs.
Trump And His Wrecking Ball, Elon Musk, Take on Constitutional Guardrails
On the domestic front Trump is engaged in a different war – to best the bureaucracy in a battle to shrink the government, pressing hard on constitutional guardrails. His hit-man, Elon Musk, dismantled USAID, retaining only 290 of the 10,000 employees who have been doling out some $40 billion of foreign aid annually, including $40,000 for seminars on gender identity at the Edinburgh International Book Festival, and millions to LGBTQ groups in Cyprus, Serbia, Albania, Slovakia, and Africa. Law suits have been filed that will determine whether the constitutional guardrails are sufficiently strong to keep the dynamic Trump/Musk duo on the straight and broad paths envisioned by our Founding Fathers.
Finally, we are witnessing a drive to establish a new American imperium. Greenland, with its vast natural resources and strategic location, is to be brought under American control, heading off the Russians and Chinese in the Arctic. Control of the Panama Canal is to be regained, a threat that prompted Panama’s president to withdraw his country from its Belt and Road Deal with China, cancelling contracts with Chinese firms involved in the Canal.
Gaza Reimagined
There’s more. America is to “take over” Gaza. Its two million inhabitants will be offered “beautiful homes” elsewhere to follow the 150,000 who have moved on since October 2023. The Gaza strip will become “the Riviera of the Middle East,” just as Beirut was “the Paris of the Middle East” until Hezbollah emerged.
Hamas sees a launching pad from which to destroy Israel. Trump breaks a taboo on discussing alternatives. He sees a 140 square-mile demolition site cleared of lethal debris, its 25 miles of Mediterranean coastline glistening with luxury hotels, condos and casinos. Perhaps eventuating in a more modest plan to move Gazans south while the north is cleared and rebuilt, and then reverse the flow.
A legacy to rival the Pharaoh’s pyramids. Better even than the Nobel Peace Prize.