The tariff hammer finally fell on Canada/Mexico, and it is unclear how long the new policy will remain in place (and whether new tariffs will be stacked on top of them). Although the tariffs will have major negative economic effects, the Trump White House is detached from objective reality, and so the negative effects will not force anything.
The people around Trump are too afraid to give him any negative news, and instead they stew themselves in a MAGA propaganda environment. And this is widespread. I even had an enraged Canadian “conservative” sending me rage emails when I pointed out the obvious: Trump’s antics would sink the Conservative Party (and subsequent polling bear my observations out). Any attempts to look at actual outcomes of tariffs will be ignored, allowing them to continue.
It is entirely possible that there will be a rapid flip-flop — the possibility of which was raised yesterday (first day of tariffs being enacted) by a Trump official. Given that Trump lies continuously — and his followers are willing to believe anything he says — he can point to literally anything the Canadians/Mexicans do as a concession and he can declare victory. And from his perspective, even a short period of tariffs is a victory — he believes that the uncertainty will force manufacturers to relocate factories to the United States, and that he has damaged his enemies in Canada and Mexico. That said, reversing the policy removes the sweet tariff revenue that would allegedly pay for his income tax cuts.
The Canadian counter-tariffs are generally aimed at politically sensitive states. (The Mexican response has been delayed, at least at the time of writing.) The idea is that other political centres of power in the United State would feel the political pain, and exert pressure on Trump. The problem with that strategy is that Republicans generally are marinating in the same propaganda broth, and they are acting as if they do not expect that there will be free and fair elections in the future. My belief is that the latter view would be a mistake, but in the absence of a near-term obvious crisis, the Republicans will continue to ignore economic outcomes (possibly by rigging the statistics, which they have announced that they would like to do).
If the tariff policy is sustained, the main question is whether he widens the tariff wall against Europe — pushing the United States towards autarchy. Although the United States could theoretically do better in a trade war versus other developed economies, tariffs are not the only thing changing. The United States is in the process of dismantling its federal government and welfare state, while the rest of NATO looks to be undertaking a burst of military Keynesianism. This burst of military spending is not going to be enough to rescue the Canadian economy from a sharp contraction as North-South trade collapses, but it would provide reason to hope that the Canadian economy can reorient itself in the medium term.
The reorientation of the Canadian economy is pretty much baked into the cake. Consumer boycotts of American goods are being institutionalised, tempers have frayed, and policymakers are looking to find alternative markets for imports and exports. The Big Three automakers are in a lot of trouble, and if they survive in Canada, they would have to reorient themselves to selling Canadian-made cars in Canada. It might take some time, but non-oil natural resources would likely find new markets, while there is now greater urgency to build a pipeline to get Albertan crude to a Canadian port.
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