March 7 (UPI) — The newly imposed tariffs President Donald Trump has placed on Canada, China and Mexico will cause increased prices, job losses and slowing business, economists say.
After a short lapse, Trump put 25% tariffs on Canada and Mexico and a 10% tariff on China into effect. The move has sparked what Joshua Gotbaum, an economist with the Brookings Institute, describes as a trade war.
“Each side is doing economic damage to the other,” Gotbaum told UPI. “This is the reason why countries don’t usually do this. When you start a trade war, like other wars, you can’t control where it goes.”
Within two days of Trump bringing the new tariffs into effect, he walked back their broad applications to carve out exemptions for automobiles and many goods from Mexico for one month. The stock markets rebounded upon the announcement of the delay after being sent tumbling for the short time that the blanket tariffs were in effect.
Trump said in a social media post that he is reworking the tariffs on Mexico out of respect for Mexican President Claudia Sheinbaum for her effort to stem the flow of migrants and drugs smuggled over the southern border to the United States.
How tariffs work
A tariff is a duty or tax placed on imports. This means, for example, that if a U.S. company is importing goods or materials from Canada with a 25% tariff in place, the U.S. company must pay 25% of the price of those goods or materials to the U.S. Treasury.
In essence, imports become 25% more expensive for U.S. companies.
There are different ways companies can approach tariffs, Gotbaum said. If a U.S. company imports a product assembled by a subsidiary in Canada that costs $10 per unit plus a 25% tariff, the company can increase the price of that product for the consumer. The product’s new price would then be $12.50 per unit.
It is not guaranteed that all companies will take this route. Some will reduce their profit margins, Gotbaum said. This means they will earn less for selling the same product. Companies with large profit margins — the difference between their revenue or money coming in and the cost of doing business or money going out — have more flexibility in this area.
Smaller companies with smaller profit margins may not see this as a feasible option.
The effects of tariffs
Even for companies that opt to cut into their profit margins to absorb the cost of tariffs, there are many broader effects and a rise in prices cannot be ruled out.
In 2020, a group of researchers published the results of a study on the impact of U.S. import restrictions on washing machines primarily from China, following the first Trump administration’s imposition of tariffs. They found that washing machine prices increased for U.S. consumers by about 12%. However, the cost of dryers, which were not subject to tariffs, increased equally.
Researchers also found that companies made efforts to mitigate the effects of tariffs by moving production from China to Thailand and Vietnam.
Ultimately consumers paid for more than 100% of the tariffs imposed.
According to a report from the Brookings Institute, the tariffs will slow economic growth in the medium term — the next three to five years.
Based on a simulation using the Global Trade Analysis Project’s model, which is a widely used and recognized economic tool, the United States will lose an estimated $45 billion in economic output by imposing tariffs on Canada and Mexico.
The retaliatory tariffs against the United States will increase that loss to an estimated $75 billion. These estimations represent a 1% to 3% reduction in gross domestic product growth.
Tariffs could have an impact on jobs as well. The Brookings Institute simulation estimates employment in the United States will decrease by up to 400,000 jobs. Mexico and Canada could see job losses as well. The estimate for Canada is more than 510,000 jobs lost and for Mexico 2.2 million jobs.
For the jobs that remain, wages can be expected to fall in all three countries. U.S. wages are estimated to decrease by 0.2% to 0.5% while wages in Canada decline by more than 2.6% and in Mexico by more than 4.5%.
“The effect of all this is it will undermine international business, increase prices, harm trade relations and it will cost jobs, not create jobs,” Gotbaum said. “It will make other countries less confident that they can do business with the United States.”
Trump’s use of tariffs
The rollout of the new tariffs has created an air of uncertainty, David Wilcox, economist with the Peterson Institute for International Economics and Bloomberg Economics, told UPI.
Trump announced incoming tariffs after taking office before delaying them for more than a month. On Tuesday they took effect but it remains unclear what their duration will be.
“If you’re a U.S. company reliant on imports of intermediate materials or finished products from one of the countries already hit with tariffs, you’re in a terrible situation,” Wilcox said. “You really don’t know what the future holds.”
In his executive orders and in public statements, Trump has outlined several reasons for imposing tariffs. He has long been critical of trade deals between the United States and its trading partners, arguing that the United States is being “taken advantage of.”
One of those international agreements, The United States-Mexico-Canada Agreement, was signed in 2020 by Trump. It replaced the North American Free Trade Agreement signed under President Bill Clinton in 1992.
NAFTA established a business environment that increased trade between the United States, Mexico and Canada by reducing tariffs, improving working conditions and expanding the markets of the three countries. This changed how many large companies approached expansion, no longer being confined to one country but instead across North America.
USMCA updated this agreement with enhanced protections for intellectual property and measures related to e-commerce.
Trump has also voiced displeasure with the U.S. trade deficit — the United States imports more than it exports.
Finally, Trump is using tariffs as a bargaining chip to influence Canada, Mexico and China to take various actions, including actions to stop the trafficking of fentanyl into the United States.
The U.S. Drug Enforcement Agency’s 2020 report on fentanyl trafficking does not make mention of any fentanyl being smuggled from Canada. The agency’s 2024 National Drug Threat Assessment, a report covering a wider array of illicit drugs smuggled into or present in the United States, does not reference Canada either.
The United States has used tariffs for similar reasons before but one instance that Wilcox draws parallels to is the Smoot-Hawley Tariff Act of 1930. The act placed tariffs on thousands of imported goods with the expressed purpose of protecting American businesses and farmers.
The impact was far different as the tariffs are blamed for sparking a historic trade war and worsening the effects of the Great Depression.
As Trump and close adviser Elon Musk tout an “America first” approach to governance, so too did the magnate of the time, Charles Lindbergh.
Lindbergh was influential in the isolationist America first movement of the 1930s that pushed for the United States to stay out of World War II. He and his fellow isolationists were opponents of President Franklin Delano Roosevelt’s New Deal programs, fearing it would draw the United States into international relationships and result in it becoming involved in the war.
“What I think is unusual about the current situation is this administration seems to be combining moves to detach the United States, not just in the economic sphere with tariffs, not just in the security sphere which was the goal of isolationists in the late 1930s, but in many different spheres all at once,” Wilcox said. “For that, I’m not sure there is an apt historical analogy.”
