The Realpolitik of U.S. trade policies and tariffs is driven by the fact that China is the top priority for U.S. national security and economic security in Cold War Two. Despite the aims of these policies, downside risks to financial markets and the economy are significant, especially in the near term.
USMCA Tariffs And Transshipments
Viewing recent developments with U.S. tariffs on imports from Canada and Mexico, as well as the Trump administration’s attitude toward the Russian War on Ukraine, makes the most sense if the top priority is to box out China. This policy focus would support a view that renders all other conflicts as secondary, and it would explain why U.S. economic power is being leveraged against USMCA partners to stop Chinese willful tariff evasion through transshipments.
Countering China Is The Top Priority Of Tariffs And Other Policies
Making China the top U.S. adversarial priority seems to be the Trump administration’s policy ambition that makes the most sense from a consistency standpoint, regarding the U.S. cutoff of aid to Ukraine as well as U.S. tariffs on Canada, Mexico, and China.
U.S. Tariffs On Canada And Mexico
The March 4th implementation of U.S. tariffs of 25% on Canada and Mexico is significant and worrisome to many U.S. businesses and industries. U.S. tariffs are likely being wielded to push Canada and Mexico to advance U.S. national security and economic security aims.
The Trump administration is seeking support from our neighbors to increase border security to reduce illegal immigration, reduce fentanyl trafficking, and address the biggest geopolitical issue, transshipping-enabled willful Chinese tariff (tax) evasion.
The implementation of tariffs seems staccato and risky for the economy. However, the administration may view the situation as one where the United States has repeatedly asked for help from its neighbors to improve border security, reduce fentanyl smuggling, and stop willful tariff evasion of Chinese goods.
Since asking nicely has not worked, the new policy direction is to ask more forcefully.
Negotiations hit a roadblock, leading to the implementation of U.S. tariffs. These are negotiations that would likely have occurred in the future as part of the USMCA sunset clause review in 2026. However, the administration does not want to wait that long before addressing Chinese tariff-evading transshipments that are open secrets across North America.
In evaluating the administration’s decision to implement tariffs on its USMCA partners, it is worth considering that threats cannot be effective policy deterrents or incentives if they are not credible. Enacting tariffs makes them a credible threat, but Canada and Mexico clearly have the agency to limit the duration of tariffs.
Future progress from Mexico and Canada to address the top U.S. border security issues and advance U.S. economic security aims could result in USMCA tariffs being in place for only a very brief period of time.
U.S. Tariffs On China
While there is a high potential for USMCA tariffs to be lifted quickly, there is little hope that the latest additional U.S. tariffs of 10% on Chinese imports will be lifted. After all, if the goal of U.S. geoeconomic policy is to box out China, tariffs on China are helpful.
The full impact of new U.S. tariffs and reciprocal responses is unclear, but additional tariffs present significant negative financial market and economic risks in the near term.
Policy Beyond Tariffs: Ukraine
While pulling U.S. support from Ukraine could destabilize the conflict, put NATO members at elevated risk, and embolden China in Taiwan, the administration is likely focused on two potential outcomes from suspending U.S. support for Ukraine that could advance the U.S. prioritization of conflict risks with China.
In one case, pulling U.S. support could force Ukraine into an armistice or ceasefire with Russia, even if it likely proves temporary. Regardless of how temporary such a cessation of hostilities may be, this policy might allow the United States to focus on China.
Alternatively, pulling U.S. support for Ukraine could result in an ongoing conflict between Ukraine and Russia in which European nations take the lead in providing financial aid and materiel support to Ukraine, which would also allow the United States to focus on China.
Even the proposed deal for the U.S. to secure rare earth minerals from Ukraine seems designed to decouple the U.S. from Chinese supply chains and make the U.S. more economically resilient and able to resist economic dependence on China.
Impacts Of Tariffs Depend On Duration
The magnitude of the impact that U.S. tariffs (and resulting retaliatory tariffs) have on U.S. inflation and growth will depend greatly on the duration of tariff implementation.
While tariffs have been announced and implemented, the goal is not to generate tariff revenues. Instead, the goal is to box out China and strengthen U.S. economic security and national security by securing support from Canada and Mexico.
Tariffs could add some upward price pressure, exacerbating inflation in some categories of goods. However, trade and tariff policy risks and uncertainty could weigh on consumer confidence, which already weakened sharply in February.
Since almost 70% of U.S. GDP is driven by personal consumption, weaker consumer confidence would present downside risks to U.S. economic growth and could prove deflationary.
In sum, tariffs could be inflationary but also recessionary and deflationary. Both of these scenarios present significant risks that could have significant impacts for the future of Fed monetary policy.
Realpolitik Of U.S. Tariffs
The Trump administration’s perspectives on tariffs are driven by Realpolitik, which means policies could change rapidly and with little notice. However, the administration’s laser focus on China is unlikely to wane or waver, according to Prestige Economics, which produces Cold War Two® research.
Ultimately, the latest tariff moves underscore a shift toward a more aggressive U.S. geoeconomic posture to address Cold War Two challenges, where economic security is viewed as an extension of national security, with China as the focal point.
However, despite the intended geopolitical aims of using tariffs as leverage, tariff and trade policy uncertainty present significant near-term economic and financial market risks.
What do you think of U.S. tariff and trade policies?
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