Trump’s Risky New Era of Broken Trade Norms

Edward Alden is senior fellow at the Council on Fore­­­ign Relations, specializing in U.S. economic competitiveness, trade, and immigration policy.

For many decades now, the international economy has been backstopped by a reasonably predictable set of rules, led by a United States that believed it had a strong national interest in nurturing that sort of predictability. With President Donald Trump’s decision over the week to declare a specious “emergency” for the purpose of slapping crippling tariffs on his continental neighbors, that era has come to an end. What follows now is, well, hard to predict.

Trump’s signature accomplishment in his first term was to renegotiate the rules of trade in North America, creating what Canada and Mexico believed would be a solid foundation for their economies for the next generation. Each of those two countries has built its economy around exports to its larger neighbor. As my CFR colleague Shannon K. O’Neil has argued, the closely knit supply chains in North America are not just beneficial for those smaller economies, they are the foundation of competitiveness across the region.

Yet the United States will now impose, starting Tuesday, tariffs of 25 percent against most Canadian and Mexican goods; in a small sop to the politically sympathetic Canadian province of Alberta, and to U.S. gasoline buyers, the tariffs on oil and other energy exports will be limited to 10 percent. China, which Trump had threatened during his campaign with tariffs as high as 60 percent, was also hit with new 10 percent tariffs on top of the existing ones from Trump’s first term, which had been maintained by the Joe Biden administration.

Trump has alleged that the new tariffs are necessary to stop illegal migration and the smuggling of fentanyl—in the case of Canada and Mexico—and against China because of its failure to halt the production and distribution of illicit fentanyl. 

A Sense of Betrayal

The sense of betrayal on both sides of our shared borders is impossible to overestimate. Canadian Prime Minister Justin Trudeau—in announcing reluctantly his nation’s plans to impose retaliatory tariffs—used the press conference to recount the century of loyal friendship from Canada. “From the beaches of Normandy to the mountains of the Korean peninsula, from the fields of Flanders to the streets of Kandahar, we have fought and died alongside you during your darkest hours,” he said. David Eby, premier of the west coast province of British Columbia, called it “a complete betrayal of the historic bond between our countries and a declaration of economic war against a trusted ally,”

Mexican President Claudia Sheinbaum rejected the Trump’s administration’s rationale for the tariffs as “slander” and called on the United States to fix its own broken system of public health and addiction treatment.

Amidst the recriminations, other countries and companies across the world—including other close allies—are desperately looking for some method of coping with Trump’s sudden escalation of trade warfare. Modern capitalism is impressively adaptable—most companies can probably figure out how to thrive in a world of tariffs nearly as well as they did in the world of freer trade. But a world of randomly imposed tariffs, for an unpredictable set of reasons, makes rational planning all but impossible. 

Since the United States started walking away from the World Trade Organization (WTO) a decade ago—tiptoeing during the Barack Obama administration and then stampeding during the first Trump and Biden administrations—there have been efforts to restore greater order and predictability to global trade. The WTO was the most comprehensive and ambitious set of international economic rules ever constructed, but in the end its reach exceeded its grasp. Narrow national interests almost always triumph over sermons about the virtues of “a rules-based system.”

The  ‘Friendshoring’ Strategy’s Rise, and Fall

Yet until last month, it seemed that some framework of rules would survive. When Trump renegotiated the North American Free Trade Agreement into the new United States-Mexico-Canada Agreement (USMCA), he proclaimed it “the largest, most significant, modern, and balanced trade agreement in history. All of our countries will benefit greatly.” Most of the new tariffs he imposed in his first term were aimed at China, which was emerging as not just an economic competitor, but a growing security threat.

President Biden built on the same premise. He continued to tighten the screws on China, especially restricting exports of high-technology goods. And his administration encouraged allies to engage in what came to be known as “friendshoring,” in which companies were encouraged to shift investments away from China to more reliable low-cost partners like Mexico and Vietnam. An announcement by Trump to escalate those tariffs significantly on China—during the campaign he had bragged he would impose tariffs as high as 60 percent—seemed a logical extension of the strategy.

Instead, in his first weeks back in office, Trump has threatened and imposed tariffs in an utterly random, incomprehensible fashion. To impose the new tariffs on Canada and Mexico, Trump is using the extraordinary powers granted by Congress under the International Emergency Economic Powers Act (IEEPA) to declare a national crisis over unauthorized migration and imported fentanyl. There are few historical examples, and no significant ones, for the United States using the tariff weapon to achieve such utterly unrelated policy goals. 

The United States is now signaling that tariffs are an all-purpose club to be used for whatever policy goal the president wishes. “Tariffs are a powerful, proven source of leverage for protecting the national interest,” said the White House fact sheet released with Saturday’s tariff announcement.

That formula will create enormous—in many ways unprecedented—uncertainty not just in North America, but in the entire global economy. Trump has already used the tariff threat against Colombia over deportation of migrants from the United States and has threatened it against the BRICS countries over their plans to de-dollarize. There is no reason to think it will end there. The United States has expansive national interests across the world, so it is hard to think of a country that could not find itself facing Trump’s tariff weapon.

A Murky Endgame

Trump’s endgame is hard to deduce. Will trade return closer to normal when U.S. trade deficits shrink? When global use of the U.S. dollar rises (beyond its already very high level)? When fentanyl overdoses decline in the United States? When unauthorized migration to the U.S. falls more, even though the numbers today are the lowest in years. When the tariffs raise enough revenue that Trump can cut taxes further? It may be any or all of these. Or Trump could just keep inventing new rationales to impose tariffs.

Perhaps the chaos will bring some benefits to the United States. In an unpredictable world, investment might seek safe haven in the large U.S. consumer market. But there are many other less sanguine possibilities. Capital might again flow to China, which will be eager to expand trade with the countries Trump is abandoning. Or companies might just sit on their dollars, waiting for some clearer sign that new rules and agreements are being reached that will bring greater predictability back to trade.

Retaliatory actions are also difficult to predict. Canada and Mexico have both announced in-kind tariff responses, but the Trump administration has warned that will only result in still higher tariffs. That could lead to all sorts of asymmetrical retaliation, with the countries restricting exports of oil or other critical goods to the United States. With Trump coveting territorial expansion in North America, it is hard to know where such escalation might end.

Scholars will debate for many years the pros and cons of the old rules-based system, whether its benefits in expanding global wealth offset the costs in rising inequality both across and within nations. But it’s hard to imagine there will be contention over whether a world with some agreed trade rules is better than a world with none. That was a lesson the world seemed to have learned thoroughly from the economic conflicts of the 1920s and 30s and the wars that followed. Sadly, we are about to run that experiment again.

This work represents the views and opinions solely of the author. The Council on Foreign Relations is an independent, nonpartisan membership organization, think tank, and publisher, and takes no institutional positions on matters of policy.