What the President wants from Mr. Carney this time isn’t exactly clear. “If Canada works with me to stop the flow of Fentanyl,” he says, “we will, perhaps, consider an adjustment to this letter.” Should Mr. Carney name three or four more fentanyl czars? The White House says the 35% tax won’t apply to imports that meet USMCA rules, which as of May 31 was about 58% of the total. Yet billions of dollars in Canadian imports could still get whacked.
For the record, since Mr. Trump has a fixation with trade deficits, the U.S. had a surplus with Canada last year when excluding $141 billion in crude oil imports. Canadian crude feeds refineries in the Midwest and some on the Gulf Coast that aren’t equipped to process U.S. shale blends. Crimping that flow would eliminate the overall trade deficit with Canada, but it would also raise costs for U.S. consumers, while sending dollars to the Middle East instead.
Mr. Trump seems to think that his unpredictability is a negotiating advantage. But keeping trading partners guessing—along with investors and U.S. companies with global supply chains—isn’t a recipe for economic strength.
The majority of America’s energy imports come from Canada and in 2023, the U.S. imported $119 billion worth of crude oil, refined petroleum products, natural gas, and natural gas liquids from its northern neighbor, accounting for 58 percent of the volume of hydrocarbons imported by the U.S., according to Canadian Energy Regulator data. Moreover, Canada was the source of 85 percent of the electrical energy imported by the U.S. that year, per the Canadian Energy Regulator. With energy accounting for 20 percent to 40 percent of steel production costs, according to the World Steel Association, taxing energy imports will make American-made steel more expensive and concomitantly less attractive in the international market.
Clark Packard is correct: Trump’s “new tariffs will push countries closer to China.” Two slices:
The [Trump trade] measures include a 25 percent effective tariff on close allies Japan and South Korea, as well as steep rates on key Association of Southeast Asian Nations (ASEAN) members Cambodia (36 percent), Malaysia (25 percent), Indonesia (32 percent), Laos (40 percent), and Thailand (36 percent). And the tariffs could go higher still. The administration warned Japan and South Korea that “if for any reason you choose to raise your tariffs, then whatever number you choose to raise them by will be added onto the 25 percent we charge,” adding that “goods transshipped to evade a higher tariff will be subject to that higher tariff.”
As China deepens its economic foothold across Asia, bolstering US trade and investment ties with Japan, South Korea, and ASEAN nations—which collectively accounted for 13.95 percent of US imports in 2024—is crucial to sustaining its regional influence. Yet the administration’s tariff threats strain ties with these partners, heightening the risk that they drift closer to China’s economic orbit. The risk is especially pronounced given that China has free trade agreements (FTAs) with South Korea, Japan, Indonesia, Cambodia, Malaysia, Laos, and Thailand through the Regional Comprehensive Economic Partnership (RCEP) trade deal.
While the US sends threats, China has been offering market access. This contrasting approach appears to be paying dividends for Beijing.
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It’s difficult to understand how Trump’s threatened 25 percent tariff response to Korea’s near-zero preferential rate is in any way reciprocal, or what value a new deal could offer beyond the one already in place. Furthermore, Trump already renegotiated KORUS in 2019, granting South Korea an exemption from Section 232 tariffs in exchange for capping steel exports and making minor adjustments to drug pricing, US auto standards, and customs procedures.
What is clear, however, is that violating KORUS would undermine America’s credibility as a partner in its own free trade agreements.
Also rightly criticizing the Man of Steal’s tariffs is the Editorial Board of the Washington Post. A slice:
On average, prices for imported steel and aluminum increased almost 30 percent between January and May. Roughly half of all aluminum and a quarter of all steel in the United States is imported. Prices for other inputs, including textiles, leather, and rubber and plastics, have also increased substantially.
So, rather than protecting American businesses, Trump appears to be hurting them — particularly those in the auto industry and other sectors that rely heavily on inputs from abroad. Trump this week also announced a 50 percent tariff on copper, which will worsen the problem.
GMU Econ alum Bryan Cutsinger asks if tariffs are inflationary. Two slices:
Much of the debate over whether tariffs are inflationary has focused on their effect on the price level. There seems to be broad agreement that higher tariffs lead to a one-time increase in the price level, not a sustained rise in the rate of price increases, that is, inflation. If it takes time for tariffs to pass through to consumer prices, inflation may temporarily pick up — a point Fed officials have acknowledged. But once the adjustment is complete, the inflation rate will come back down — that is, the increases will stop, even if prices themselves remain at a new, higher level.
Is this consensus view correct? It’s certainly possible that tariffs result in only a one-time jump in the price level without causing sustained inflation. But that outcome isn’t automatic. It depends on how tariffs affect the underlying drivers of economic growth — and whether those effects are large enough to push inflation higher, justifying a policy response by the Fed.
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Tariffs are likely to reduce productivity by raising input costs and limiting access to more efficient foreign suppliers, and to distort resource allocation by encouraging production in less competitive domestic industries — both of which can lead to slower real output growth. In this sense, tariffs could be mildly inflationary if they reduce real output growth while spending continues at the same pace. But any effect on output growth is likely to be small — for example the FOMC’s projection of long-run real GDP growth has not changed since December 2019, and only then from 1.9 percent to 1.8 percent — meaning the resulting increase in inflation would also be small, given the one-to-one relationship between real output growth and inflation in the inflation equation.
If Americans truly want a massive government, with benefits and subsidies for everything from seniors to farmers to corporations, they should be honest enough to pay for it up front. The problem is they don’t want to pay. What they seem to want is Scandinavian government spending and Hong Kong–level taxation. This fantasy is indulged only by borrowing from future generations or printing money. It’s fiscally reckless and morally indefensible. Borrowing doesn’t make the cost go away; it merely shifts it forward, often in more damaging ways.
I guess, with age, that’s where I may now part with Dominic [Pino]. In the past, I would have always preferred lower taxes, even without spending cuts. I don’t anymore. First, there is the question of what it means to cut taxes. I am for lower marginal tax rates with a broader tax base — basically, tax reform. There is plenty of room to do that (and TCJA did a decent job of it). But I am against the distribution of tax subsidies (tax credits . . .), which narrows the tax base with no real growth upside (there is a ton of that with OBBBA). There is also the fact that people may not deserve a reduction in their tax burden if they refuse to scale down their spending. Tax cuts today with spending increases mean taxes tomorrow and all that jazz.
