We already knew that most economists are quite bad at economic policy. Unfortunately, foreign policy appears not to be much of a strength either. Indeed, it appears most financial experts may not even know the difference, based on their criticism of Donald Trump’s recent tariff threats against Mexico, Canada and China.
Of course, a nation can introduce tariffs to generate revenue, promote domestic production, shift international supply chains and ‘decouple’ itself from an undesirable trading partner. But a nation can also use tariffs as powerful leverage to make other states change their behaviour. That is a negotiating tariff, not an economic one, and it is designed not to minimise potential domestic pain but to maximise potential cost for the counterparty. Sudden and unpredictable actions can enhance, rather than detract from, the strategy’s effectiveness. And this is precisely how the Trump administration operates.
In Trump’s first week back in the White House, when Colombia rejected two US military aircraft repatriating illegal immigrants, the President responded by threatening to impose immediately a 25 per cent tariff on all Colombian goods (rising to 50 per cent after one week) and to restrict travel of Colombian officials. Within hours, Colombia’s President caved. Actual cost to the United States? $0. That the United States had no economic quarrel with Colombia, and that imposing the tariff would have done little to nothing for the American economy, is entirely beside the point.
Something similar has happened with Mexico and Canada. While experts spent many hours weighing up the trade balances north and south of the US border, the White House fact sheet announcing the 25 per cent levies explicitly framed the policy as ‘addressing an emergency situation’ and ‘using our leverage’.
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