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A few months ago, I had dinner with some of Canada’s business leaders and Robert Lighthizer, one of the top trade advisors to the next US president, Donald Trump.
I expected a quiet meal – Canadian leaders are generally so polite that a senior American politician once jokingly described me as the “herbivores” of world affairs.
However, this is not the case against Lighthizer. When he told the table that Trump could impose tariffs of 60 percent on Chinese imports and 10 percent on those from Canada and Mexico, there was loud shock.
“We have the USMCA! » » retorted a Canadian business leader, referring to the successor to the North American Free Trade Agreement. To which Lighthizer responded that “no deal lasts forever,” prompting some less-than-polite remarks.
This reaction is now reproduced and amplified. This week Trump posted on Truth Social of his desire to impose 25 percent tariffs on Canada and Mexico on his first day in office “on ALL products entering the United States.”
And while most leaders and investors have already mentally prepared for a deterioration in US-China relations, Trump’s threats against the USMCA are somewhat shocking.
No wonder: Joe Biden’s administration has explicitly encouraged American companies to use “near-shoring” and “friendshoring” strategies to deal with deteriorating ties between the United States and China – for example by relocating their production to neighboring countries such as Mexico.
And many CEOs have so far assumed that Trump would not reverse this situation because it would go against his economic interests: Cross-border supply chains are so integrated that it would be difficult to do so. untangling these ties and economically damaging to America. To cite just one example: cars with the “made in America” label are built with supply chains that, on average, cross the US-Mexico border seven to eight times.
However, Trump’s message reveals three key elements. The first and most obvious point, as I already pointed outis that it is extremely naive to assume that “Friendshipping” will always be friendly. The second is that Trump is now trying to test the limits of action, issuing “shocking” rhetoric to see how other nations and markets react.
It’s no surprise. Throughout his career – and his first term – Trump has consistently sought to destabilize his rivals by issuing unpredictable and extreme threats. He will now double the stake. After all, his experience has taught him that the limits of possible action lie well beyond dominant norms. And these threats often work.
Just look at how quickly Justin Trudeau, Canada’s prime minister, phoned Trump this week, looking for ways to appease him, even as he threatened retaliation. Or how Christine Lagarde, president of the European Central Bank, urged Europe “to buy certain things from the United States,” such as liquefied natural gas and defense equipment.
Third, Trump’s rhetoric is not “just” about intimidating others; it also reflects a broader ideological shift. In recent decades, most economists and CEOs have instinctively viewed trade within the framework used by 18th-century economist Adam Smith, namely as a set of economic flows between countries of similar(ish) status, from which each can make the most of their own advantages. different natural benefits.
However, Trump’s team views trade through the lens of power hierarchies, that is, as a tool to increase US market dominance in a world where trading “partners” are everything. except equal. Trade policy is therefore not only defensive, or motivated solely by national objectives (such as the repatriation of industrial processes to create jobs); it also aims to suck the economic activity of its rivals toward America and weaken them, for example by forcing raw material producers in other countries to reduce their export prices.
This mercantilist mindset is not new. Economist Albert Hirschman described it well in his classic 1945 book. National power and structure of foreign trade, who notes that for mercantilists “an increase in wealth thanks to foreign trade leads to an increase in power compared to that of other countries. . . (and) a conflict between the goals of wealth and state power is almost unthinkable.”
Phil Editoreconomist and senior fellow at the Niskanen Center, considers Hirschman an invaluable guide to current events and future risks. “History repeats itself,” he told me.
However, the political position comes as a shock to anyone accustomed to viewing free trade in “rational” economic terms. And even if Trump’s aggressive rhetoric turns out to be mostly bluster — as was often the case during his first term — this cognitive shift must be understood.
Forex traders have already integrated it into their courses. This is why the Mexican peso has underperformed this month (Mexico President Claudia Sheinbaum is trying to challenge Trump), while the Turkish lira outperformed (Trump seems to like Turkey’s strongman, Recep Tayyip Erdoğan).
However, the stock markets do not seem truly awake. Neither do some boards of directors. So at least we should all follow Verleger’s advice and re-read Hirschman’s concise warnings. Especially if you live in a less powerful country, like Canada, Mexico or the United Kingdom.
