What is the Trump Tariff Endgame?

The 'beauty' of tariffs is fading as reality sets in

‘What is Trump’s endgame?’ I have heard a version of this question consistently from business leaders and investors in Canada and Europe over the last two months. Corporate and political worlds alike have been trying to decipher every statement and tweet from Donald Trump in order to predict the future and plan a path forward through these chaotic times. Inconsistency and incoherence from the Trump administration has been making this difficult. It is hard to predict what will happen in a few hours with the Trump administration, let alone envision when a ‘new normal’ will be established and what it will look like. Markets have reflected this uncertainty through wild swings and the warning signs of a looming recession. These swings have also deepened our collective anxiety.

I have been advising people for several months not to make any dramatic decisions related to their business this spring despite the uncertainty regarding tariffs and threats against Canadian sovereignty. This is particularly the case because US tax changes may present even larger competitive challenges for our economy. Therefore, decisions about transferring manufacturing to the United States, making changes to supply chains or other critical business decisions should not be made too hastily. Personally, I hope nobody makes these moves unless they have to. I believe that the more severe impacts of tariffs and general trade uncertainty will diminish by summer. Recent moves by the President seem to support this guidance. Where will President Trump net out by summer is the point of this essay. The answer - in my view - is we will end up back where this all started with a focus on one country. [Hint: What was the first thing on Donald Trump’s mind when he took his famous golden escalator ride in 2015?]

Liberation Day and its Aftershocks

Donald Trump has been upending global trade over his two terms as President of the United States. ‘Liberation Day’ was just the latest chapter of this saga as he kicks off his second term. Trump used tariffs against many countries - including Canada - during his first term in office, so it should have come as no surprise that he is returning to this economic policy in his second. This time, however, President Trump seems far more enthusiastic about the use of tariffs and less restrained by his cabinet and personal advisors. The formal and informal team around the President this time are ‘Make America Great Again’ (MAGA) adherents who applaud the President’s instincts rather than the expert advisors from his first term who often played a challenge function within the White House. Trump 2.0 is not holding back.

Just hours after President Trump was sworn in for the second time in January, he declared that tariffs were “the most beautiful word” in the dictionary. A few months later, however, the Trump-Tariff romance has been going through a bit of a rough patch. Tariffs have been imposed with great fanfare only to be paused within days. Tariff rates rise and fall each week, and there has been an incredibly wide variation in rates ranging from 10% on some countries to a possible 245% on others. Trump has applied tariffs against global rivals to the US like China, but also against historic allies like Canada. The incoherence of the American approach to tariffs seems to indicate that policy decisions flow from the President’s personal preferences or his emotional reaction to a situation. Retaliatory action from a country leads to anger, while obedience leads to good favour. With such a temperamental and irrational approach, it is very difficult for world leaders to find the right balance between showing sovereign principle and limiting the damage on their national economy amid this unprecedented trade war.

In the last few days, however, reality appears to be descending on the White House. The President seems to me making changes to his approach on tariffs based on the advice (or panic) of his corporate supporters and personal advisors. Many of the corporate friends of the Trump administration have been personally impacted by the tariffs and/or the stock market shocks stemming from US tariff action. The best evidence for this presumption about the change in Trump’s approach can be found in the sharp comments from the President’s ‘First Friend’ regarding the President’s trade advisor Peter Navarro. Elon Musk called Navarro “dumber than a sack of bricks” and even worse derogatory terms on his X platform (formerly Twitter). This personal pressure on the President along with the shocks in the bond and stock markets no doubt led the President to quietly implement tariff carve outs for specific Chinese technology goods. This tariff removal occurred despite the imposition of Chinese retaliatory tariffs and their provocative public responses to American trade action. The ‘beauty’ of tariffs appears to be fading and this signals the start of the Trump walk back on widespread use of tariffs.

How We Got Here

To predict where things may net out with President Trump on tariffs you have to understand how Donald Trump looks at trade. Future behaviour is best predicted by looking at past behaviour, as the old axiom goes. Donald Trump has long viewed America as being weakened by trade. There are countless interviews from decades ago where Donald Trump bemoans the United States “losing” to Japan or a range of other countries. To Trump, everything in business is about negotiation and finding a winner and loser. If the United States has a trade deficit with another country, in Trump’s view they are losing to that country despite the fact that the balance of payments approach to comparing goods and services trade between countries does not include intellectual property value and many other measures of economic gain where the United States dominates. Trump views trade as a zero sum game, but under old rules that Trump does not realize have changed. His view on trade deficits actually belies his lack of understanding of how modern, international trade works.

While the United States did see a large amount of manufacturing leave their country over the last half century, the investment and jobs lost as a result were eclipsed by the incredible growth of the intangibles economy. Silicon Valley in California sprung forth from the desert, while Allentown, Pennsylvania (from the Billy Joel song) declined. A simple look at the history of the S&P 500 measure in the US shows over this period how the intangible economy exploded as manufacturing retreated. The US economy is today far more reliant on intellectual property and intangibles than it is on traditional goods trade. This economic shift of the American economy has been the major blind spot for Donald Trump on trade. As President he is standing up for Americans he believes have ‘lost’ from trade deals, when in actual fact they have been suffering as a result of poor policy that did not respond to this shift towards the intangibles economy.

The Left Behind Americans

The US economy shifted and experienced incredible growth in the last forty years, but not all Americans benefited from this growth. People who lost jobs in manufacturing were generally forced to take service based jobs that were more precarious and did not have the pay and benefits that earlier generations had enjoyed in a largely unionized blue collar workforce. The frustration and anger felt by many Americans in the so-called ‘rust belt’ states where manufacturing declined is understandable, but blame cannot be laid at the feet of global trade alone. Blame for the plight of these left behind workers is better placed at the feet of policy makers and politicians who did not adequately address this ‘hollowing out’ phenomenon as traditional, blue collar jobs disappeared in regions of the country and unemployment and misery moved in.

In fact, the term of ‘rust belt’ itself came from a political campaign held at what could be seen as the tipping point of the declining fortunes of these American manufacturing regions. During the 1984 presidential campaign, Democratic candidate Walter Mondale used the term “rust bowl” to elicit an emotional connection between the struggles of people living in Midwest and Great Lakes manufacturing cities to the plight of Americans who had suffered through the 1930s depression-era ‘dust bowl’ famine in the Great Plains. Mondale was trying to evoke Grapes of Wrath type imagery in the minds of voters to try and dent the popularity of Republican President Ronald Reagan in these states. ‘Rust bowl’ was part of an effort to win back so-called ‘Reagan Democrats’ of the time, but the press covering the Mondale campaign turned “rust bowl” comments into the “rust belt” description that has become common parlance since then. But the politics surrounding the plight of these voters did not end there.

President Reagan defeated Mondale in that election and went on to sign the Canada-US Free Trade Agreement. This set the stage for the North American Free Trade Agreement (NAFTA) with Mexico joining the free trade pact under his Republican successor George Bush. The globalization trend further accelerated a few years later when the Clinton Democrat administration supported the accession of China into the World Trade Organization (WTO) in 2001. By the new millennium, globalization and free trade was supported by both major parties and that was an important element of the erosion of trust in the traditional parties by many Americans.

Throughout the 1990s and into the 2000s, the U.S. goods trade deficit ballooned. Lower-cost imports came in from Mexico, China and other countries bringing prices down on consumer goods, but further compounding the challenges for US manufacturing. The negative impact on former manufacturing communities like many in the rust belt was well understood by politicians of the day, but very little was done to adequately address the inequalities and erosion of trust in ‘the system’ that was developing.

There were attempts at policy solutions, but they were halfhearted when you considered the rising wealth of the American economy. Republicans led by Jack Kemp supported policies like “enterprise zones” using tax incentives to attract opportunity to these regions. Democrats adopted similar approaches calling them “Promise Zones” and spoke about using education to address shifts towards the ‘knowledge economy’, but in the end very little was done to help find decent paying jobs and purpose for many of the displaced workers in the rust belt.

By the 2000s and 2010s, Americans living and voting in the rust belt began to push back against an establishment that they believed had forgotten them. The plight of these Americans was made even harder by the subprime mortgage crisis housing crash, rising disability rates and the Great Recession that hit the American economy in this period as well. These factors began to change the politics of these traditionally Democratic areas, as union membership rates were no longer significant and the Democrats seemed to have the same view on trade as the Republicans. This was fertile ground for populist movements to take root.

The recognition that millions of Americans were being left behind in the economic growth of the United States began to permeate political debates, movements and rhetoric. The best evidence of this is the 2008 presidential campaign that brought Barack Obama to power. His campaign was perhaps best remembered for his perceived mistake when he flippantly said that frustrated Americans in these states would “cling to guns or religion” as a result of their resentment. In my view, it is actually the clarification speech he gave days later to recover from this campaign stumble that best expressed the challenges facing many American families living in these regions.

But I will never walk away from the larger point that I was trying to make. For the last several decades, people in small towns and cities and rural areas all across this country have seen globalization change the rules of the game on them. When I began my career as an organizer on the South Side of Chicago, I saw what happens when the local steel mill shuts its doors and moves overseas. You don’t just lose the jobs in the mill, you start losing jobs and businesses throughout the community. The streets are emptier. The schools suffer.

- Senator Barack Obama, as he then was, AP Annual Luncheon, April 14, 2008¹

This acknowledgment of the suffering of millions of Americans was an indication that political leaders in the United States understood that there was deep-seated resentment growing in large swathes of the country. This resentment stemmed from views towards globalization, the loss of manufacturing jobs and a growing wealth divide that eroded trust in institutions and traditional politics. At the same time the Democratic candidate for president was making these statements and featuring the one-word slogan “Hope” on his campaign posters, the early growth of the Tea Party movement was beginning to change the Republican party and how it viewed many issues. By 2010, the Tea Party would have a major impact on the mid-term elections and help the Republicans make major gains in the House of Representatives to fight the agenda of President Obama.

MAGA is Rooted in Trade Resentment

The Tea Party movement began to shift the Republican party away from its traditional views on trade and set the stage for Donald Trump who would effectively harness this populist anger and give millions of voters hope in the persona of someone who ‘won’ at business and was running for President so that America would stop ‘losing’. For completely different reasons, Trump was just as skeptical about free trade and globalization as many of these voters were. His confidence and message of cleaning up "the swamp” in Washington appealed to the resentment of millions of voters in the rust belt states and many other parts of the country. The party that had championed liberalized trade and the rules-based international order, would soon throw out the rule book with their presidential candidate.

Global trade would never be the same when Donald Trump descended down the golden escalator in Trump Tower on June 16, 2015 to announce his run for President of the United States. It was at this event that Trump made his central promise to millions of Americans who felt left behind in the country. Trump was going to ‘Make American Great Again’ and win back their jobs. He was going to improve their communities and restore their nostalgic view of the country they remembers from decades ago. He was going to give them the hope they had been yearning for.

Within forty seconds of starting his speech at the bottom of that golden escalator, Trump framed his presidential campaign around restoring an America in decline by winning at trade.

Our country is in serious trouble. We don’t have victories anymore. We used to have victories, but we don’t have them. When was the last time anybody saw us beating, let’s say, China in a trade deal? They kill us. I beat China all the time. All the time.

Donald Trump launching his Presidential bid, June 16, 2015

Donald Trump’s first presidential campaign was built upon decades of rising political frustrations in the United States and the fact that millions of voters in swing states were drifting from their Democratic voting tradition because they felt left behind in the prosperity of America. The populist spirit of the grassroots Tea Party movement that began in 2008 had peaked by 2012 and needed a galvanizing and charismatic leader to solidify their organizational gains. Trump became that leader when he praised Tea Party activists at their convention just a few months after the launch of his campaign.

The tea party people are incredible people. These are people who work hard and love the country and they get beat up all the time by the media.

The Tea Party supporters jumped on Trump’s campaign for the Republican nomination in 2016 and became the vanguard of the MAGA wing of the Republican party. Trump steamrolled through the opposition in the primaries and became the Republican candidate in 2016 with a conservative coalition that included the traditional Reagan Republicans alongside the new MAGA wing. The differences in this coalition caused friction throughout the first Trump presidency, but by the second the MAGA wing had become the Republican party.

Trump Endgame

With the past better understood, we can now look to the future to try and predict what Donald Trump do in the coming months on tariffs and his general assault on global trade norms? The answer I hinted at at the beginning of this essay can be found in the first reason Trump gave for running in that golden escalator speech in 2015. When everything nets out on tariffs in the next few months it will all be about China in the end. He promised those left behind Americans that the country was going to win again in trade relationships, and he viewed China as the biggest threat to the American way of life.

This is supported by his action in his first term. The first example of the aggressive use of tariffs by Trump came in 2018 and it was directed towards China. President Trump used powers under section 232 of the Trade Expansion Act, 1962 to apply tariffs on steel and aluminum imports. This was aimed at the impact of a reliance on steel and aluminum imports by the United States and the impact it would have on the national defense of the United States. While the Trade Expansion Act, 1962 was created to support the growth of global trade and the American anchor role in the rules-based trade order, the Act permitted free trade to be curtailed if it had a negative impact on national defence.

The Commerce Department concluded that the reliance of the American economy on imported steel and aluminum and the growing role of the state-led Chinese economy made such action necessary. The US needs sufficient access to steel and aluminum resources to adequately build tanks, ships and aircraft. Losing such access because of Chinese control of these markets was viewed as a risk to national security. This gave Trump legal coverage for his ability to impose tariffs against China and this general approach has had quite widespread, bipartisan support.

Canada was brought into this trade action because we did not align on this tariff policy approach and because the Canadian market was viewed as a transshipment point for the diversion of Chinese steel products through Canada into the United States. Transshipment was viewed as driving up dependencies in the United States and circumventing tariff action. While the Trudeau government initially resisted aligning on these trade actions against China and did not make steel or auto a priority in the NAFTA re-negotiations that had started in 2017, the Prime Minister suddenly took them seriously in the days after 25% tariffs were imposed against Canada on steel and aluminum. The Americans were serious and Canada had not been paying close attention.

Trump lost his re-election in 2020, but the Biden administration continued his general approach of tariffs and trade action against China. As geopolitical tensions between the two largest economies deepened, the application of sanctions and tariffs to manage trade between the two superpowers extended trade action to semiconductors, critical minerals and electric vehicles (EVs). Trade tensions with China only increased under President Biden, which set the stage for the return of an even more aggressive Donald Trump. After all, Trump had said he was the leader who “beats” China all the time.

In August 2024, months before the end of the presidential election in the United States, Canada finally came fully into line on US trade policy with respect to China on steel, aluminum and EVs. This was recognition that regardless of who won the election that Canada needed to quickly get back into step with our most important trading partner at the risk of losing our special access to the US market. Despite the fact that we were now aligned with the US on key trade actions with respect to China, President Trump continued to have lingering issues with the Canadian government and has treated us unfairly and with a high degree of disrespect. Whomever wins the election on April 28th, they will have to stand up, push back and be smart in this ever uncertain world.

My prediction is that most tariffs against Canada will come down to the 10% range if they don’t disappear entirely by summer. The focus of the Trump administration over the course of this term will be re-balancing the US-China trade relationship in a way that he will be able to declare several high profile ‘wins’ to the voters who have found hope in the MAGA movement. It will also mean a sustained effort to regain American strength in ship building, defence and auto production. This offers opportunity for Canada because of our degree of integration in these areas.

For business, my advice is to be prudent to ensure that an over-reliance on China for supply chain, customers or capital is avoided. Corporate and political leaders must also ensure that we don’t let the frustration we might have with the Trump rhetoric surrounding the ‘51st state’ leads us to turn away from the opportunities of the American marketplace that will likely become more reliable again once we reach this new normal by fall.

Elbows Up and Smarten Up - this should be the Canadian approach for the next few years until hopefully smoother waters appear.

1. http://obamaspeeches.com/E06-Barack-Obama-AP-Annual-Luncheon-Washington-DC-April-14-2008-religion-guns-pennsylvania.htm