Is this all a bluff – or what?

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The punitive tariffs announced would be devastating if implemented.

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Towards the end of his first term, Donald Trump threatened the EU with punitive tariffs. The then European Commission President Juncker immediately promised the US President that the EU would import US soybeans and liquefied natural gas on a large scale. Trump subsequently dropped the tariffs and declared victory in the trade war with Europe. However, he did not mention that Juncker was unable to fulfill his promise because he did not have the necessary powers.

Cheating Trump: Former European Commission President Jean-Claude Juncker.Image source: sda

During his first term, Trump also pledged to fundamentally reform the existing free trade agreement between the United States, Canada and Mexico. However, then-Agriculture Secretary Sonny Perdue and then-Commerce Secretary Wilbur Ross explained to him what specific consequences this would have on the U.S. economy. Trump quickly revised his goals. Apart from the name change from NAFTA to USMCA, everything remains more or less the same.

Trump transformed US President Theodore Roosevelt's legendary motto into his own meaning. Now, instead of: “Speak softly, but carry a big club,” it's now: “Speak loudly, but swing a little club.” The president-elect declares himself a “tax collector” and not only exploits Talking about “tariffs” at every possible opportunity was his favorite word.

Even before taking office, he had announced general punitive tariffs of 25% on Canada and Mexico, his most important trading partners. In addition to the existing punitive tariffs, imported products from China will also be subject to an additional 10% tariff.

First, there's the age-old question: Can Trump decide on these tariffs on his own? The answer is essentially yes, because the International Emergency Economic Powers Act, a 1970s law, gives the president a large degree of discretion on customs matters.

Trump has ambitious economic goals

However, in the case of Canada and Mexico, there is also the question of whether Trump breached the contract, since the agreement was signed by himself and is valid until 2026. However, it’s well known that the president-elect doesn’t really care about legal details, so it’s unlikely that USMCA will stop him.

However, Trump also has huge economic ambitions. His goals are the 3-3-3 agenda, which means: gross domestic product (GDP) growth of 3%, domestic soil should produce an additional 3 million barrels of oil per day, and a reduction of the annual national deficit to 3% of GDP. It is doubtful whether these goals can be achieved by alienating two of the most important trading partners.

Mexico is now the United States' largest trading partner. Last year, $800 billion worth of goods and services crossed the border between the two countries. The U.S. auto industry alone imports 70 billion parts from Mexico. It’s hard to imagine how it would respond to 25% punitive tariffs. So it's no coincidence that shares of Ford Motor Co. (-2.6%) and General Motors Co. (-9%) plummeted after Trump's announcement.

Awake: Claudia Sheinbaum, President of Mexico.Image: trapezoid

The United States also imports about half of its vegetables from Mexico and Canada. Although the United States now exports oil, it will still import 8.3 million barrels per day of petroleum products from Canada in 2022. The punitive tariffs announced will also have a serious impact on the U.S. labor market. Mexican Economy Minister Marcelo Ebrard said 400,000 jobs in the United States would be destroyed.

So there are plenty of signs that Trump is bluffing. Shortly after the punitive tariffs were announced, he spoke by phone with newly elected Mexican President Claudia Scheinbaum. He later declared the conversation “fabulous.” Trump also hopes to use punitive tariffs to stem the importation and immigration of fentanyl drugs. Progress has been made on that front, he explained after the call.

President Sheinbaum struck a conciliatory tone, though she was more sober.

The fact that Trump has put two traditionalists in charge of the economy supports this bluff argument. Treasury secretary nominee Scott Bessent is considered a conservative. While he praised Trump's punitive tariffs, he also noted that they should not be rolled out suddenly but in small steps. Nominated economic adviser Kevin Hassett is also considered a moderate. Robert Lighthizer, who may also have a major say in trade policy, is considered a nationalist hardliner but is also a capable economist.

Considered a moderate: Treasury secretary nominee Scott Bessent.Image: trapezoid

But what if Jesuits gain the upper hand in Trump’s cabinet? What if they succeed in enforcing mass deportations and punitive tariffs? After all, Elon Musk has declared that pain is to be expected, at least at the start of what one hopes will be a conservative counter-reformation. In addition, many prominent economists have described the deadly consequences of the new protectionism for the United States and the world.

Merely speculating that Trump is bluffing could lead to retaliation. European Central Bank President Christine Lagarde called on Europeans to take the threats seriously and seek dialogue with the president-elect. Lagarde suggested that if Trump also imposes punitive tariffs on Europe, the EU must “not fight back, but negotiate.” “That's the better strategy. Pure revenge will result in a fight with no winners.”