Trump's Trade War Is About to Begin

Reuters
By Yuval Rosenberg and Michael Rainey

It's the last day of January, and what a month this has been! The sweeping Trump overhaul of the government continued today as federal websites were scrubbed or taken down, removing public health data and other information in an effort to comply with the president's executive order to remove "gender ideology." Agriculture Department employees have reportedly also been ordered to delete and document web pages focused on climate change. According to reports, Trump is also preparing a purge of FBI leadership, and a top Justice Department official ordered the firing of some prosecutors involved in cases stemming from the January 6, 2021, Capitol riot.

Trump Set to Hit Mexico, Canada, China With Tariffs

President Trump said Friday that he will impose punitive tariffs of 25% on goods imported from Canada and Mexico and 10% on goods imported from China starting tomorrow, February 1.

White House Press Secretary Karoline Leavitt told reporters at a press briefing that the president intends to follow through on his threats to impose tariffs on the nation's largest trade partners as part of an effort to pressure those countries to limit the flow of drugs and migrants into the U.S. Leavitt claimed that all three countries have "enabled illegal drugs to pour into America."

"The amount of fentanyl that has been seized at the southern border in the last few years alone has the potential to kill tens of millions of Americans," Leavitt said. "And so the president is intent on doing this."

Leavitt said she had no information about possible exemptions from the tariffs.

In remarks delivered later in the day in the Oval Office, Trump said there was nothing China, Mexico or Canada could do at this point to stop the tariffs. He said to expect future tariffs on steel, aluminum and copper, with levies on oil, gas and pharmaceuticals also in the pipeline. He also said tariffs on European nations were in the works.

Destructive potential: The tariffs on Canada and Mexico threaten to upend roughly $1.9 trillion in trade in North America, which has operated as a free trade zone with tightly integrated production systems for three decades.

One particularly vulnerable sector spanning North America is auto production. Scott Lincicome of the conservative Cato Institute told the Associated Press that the tariffs could blow up deeply enmeshed supply lines. "You have engines and car seats and other things that cross the border multiple times before going into a finished vehicle,'' he said. "You have American parts going to Mexico to be put into vehicles that are then shipped back to the United States. You throw 25% tariffs into all that, and it's just a grenade.''

A Canadian auto executive told The New York Times that the tariffs have the potential to bring production to a halt within a week. "Nobody can absorb this kind of cost, not the automakers, not the suppliers, not consumers," said Linda Hasenfratz of Linamar, which manufactures auto parts in all three countries. "Demand will collapse, and vehicle production will grind to a halt, putting millions of workers out of work, the vast majority of which are in the U.S."

Other key imports from Canada are oil and timber, while Mexico is a top supplier of manufactured goods and agricultural products including tomatoes, avocados, berries and peppers.

All three countries threatened with tariffs have declared that they plan to retaliate against U.S exports, raising the possibility of a deeply disruptive trade war. "If the president does choose to implement any tariffs against Canada, we're ready with a response - a purposeful, forceful but reasonable, immediate response," Prime Minister Justin Trudeau of Canada said Friday. "It's not what we want. But if he moves forward, we will also act."

Higher prices could be ahead: Many economists think the tariffs would be inflationary, as the higher fees paid by U.S. importers are passed onto U.S. consumers in the form of higher prices. Asked about the risk of inflation, Leavitt dismissed the widespread concerns. "President Trump is going to do everything he possibly can to cut the inflation crisis that the previous administration imposed on the American people, and he will continue to effectively utilize tariffs," she said.

Whatever effect the tariffs may have on consumer prices, it seems likely that they will act as a drag on the economy, at least in the short and medium term. According to a new Urban-Brookings Tax Policy Center analysis, American businesses will reduce their imports from Canada and Mexico by 40% if a 25% tariff is imposed. The tariffs would raise $110 billion in the first full year, with that total falling each year as companies and consumers change their behavior. American households would be worse off, since tariffs are paid by initially importers and ultimately by consumers. The Tax Policy Center estimated that after-tax household incomes would be $930, or nearly 1%, lower in 2026 on average due to the tariffs.

An analysis by Ernie Tedeschi of the Yale Budget Lab found an even larger hit to consumer finances. Trump's tariffs on Canada, Mexico and China would produce an 0.8% increase in the price level, Tedeschi told the Times, costing households about $1,300 a year on average.

Trump defended the tariffs on Friday afternoon, saying they will lead to success, not inflation. "There may be some temporary, short-term disruption," he said, "but people will understand that."

Federal Judge Blocks Trump's Funding Freeze

A federal judge today blocked the Trump administration's payments freeze, agreeing with 22 state attorneys general that the White House order likely violated the law.

"Are there some aspects of the pause that might be legal and appropriate constitutionally for the Executive to take?" John J. McConnell, Jr., the chief judge of the district court in Rhode Island, wrote in a 13-page decision. "The Court imagines there are, but it is equally sure that there are many instances in the Executive Orders' wide-ranging, all-encompassing, and ambiguous 'pause' of critical funding that are not."

The White House Office of Management and Budget had issued a memo Monday night ordering a freeze on grants, loans and financial assistance programs. After a coalition of nonprofits quickly filed suit, another federal judge temporarily blocked the order the next day, shortly before it was to take effect. That decision is in place until a hearing on Monday.

The White House then rescinded its initial memo, but insisted that the move did not represent a rescission of the funding freeze. McConnell's order noted that White House statement, writing that "the evidence shows that the alleged rescission of the OMB Directive was in name-only and may have been issued simply to defeat the jurisdiction of the courts."

The temporary restraining order granted Friday prohibits the administration from reissuing or implementing its freeze until after a court hearing.

New York Attorney General Letitia James, one of the state officials who filed the lawsuit, hailed the ruling.

"This administration's reckless plan to block federal funding has already caused chaos, confusion, and conflict throughout our country," she said in a statement. "I led a coalition of attorneys general in suing to stop this cruel policy, and today we won a court order to stop it. The President cannot unilaterally halt congressional spending commitments."

Republicans Eye Bipartisan Deal to Raise Debt Limit

The Republican policy retreat this week "revealed how President Trump is both the glue holding the fragile majority together and an earthquake that threatens to fracture it," The Hill's Emily Brooks writes. She adds that the need to raise the debt limit is "one Trump demand that could spur the first major fissure between congressional Republicans and the president."

Republicans are likely to have to work with Democrats to lift or suspend the borrowing limit, given that some in the GOP won't vote for a debt limit increase without stee spending cuts, and some might not vote for one at all.

House Speaker Mike Johnson reportedly told Brooks this week that the issue might need to be addressed in a "bipartisan exercise" - meaning that Republicans would likely have to agree to some Democratic dealmaking demands, contrary to Trump's wishes.

Republican House Majority Leader Steve Scalise reportedly told Brooks in an interview this week that the debt limit might be paired with disaster aid or a government funding bill as Republicans tailor their strategies to tackle different legislative priorities.

"Getting spending under control is a big priority. We can do that in budget reconciliation," Scalise is quoted as saying. "If you're working on a government funding bill, that's a different coalition. If you're working on the debt ceiling, it's a different coalition. So you know, there's going to be a lot of different things we do throughout the year that involve different coalitions within Congress."

Read more at The Hill.

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