Of Jonathan Levin*

In Washington, there is widespread and bipartisan interest in addressing the troubled US trade relationship with China, the world’s main rival for economic and military dominance. So it’s strange that President Donald Trump officially launched international trade threats this week by treating the world’s second-largest economy softly. Even more surprising is that Trump targeted Mexico and Canada, America’s friends and neighbors, with his first threats. Huh?

Both countries have signed the United States-Mexico-Canada Trade Agreement, which Trump hailed as the “fairest, most balanced and modern trade agreement ever reached.” And while our trade deficits in North America have grown in recent years since the deal went into effect in 2020, partner countries have every intention of renegotiating the deal in 2026 to address them. Trump seems to have focused his rhetoric on these countries because they are convenient scapegoats who need the US and are easily intimidated. Under Trump 1.0, there was a similar period of tension over the trade deal, even though he merely renamed and updated the North American Free Trade Agreement, or NAFTA. It’s understandable that he might want to try the same tactic again, but he’s playing with fire by using it a second time.

First, America’s North American neighbors are familiar with Trump’s games. Canada has already drawn up a list of politically sensitive imports from the U.S. it could impose tariffs in response to, and Bloomberg News reports includes products such as Florida orange juice and Kentucky bourbon. Mexico certainly makes a similar list. At first, these responses may seem small, yet the broader flow of commerce is far from insignificant.

Canada and Mexico are America’s two largest foreign markets, accounting for one-third of all US exports. As my Bloomberg Opinion colleague Liam Denning pointed out, the US would have a trade surplus with Canada if it weren’t for oil. According to a recent report by Goldman Sachs Group Inc., research on retaliatory tariffs during Trump’s first term showed that they led to lower prices and volumes of U.S. exports, lower manufacturing employment and fewer jobs. Since these typically target sectors where they can cause the most political or economic damage, Mexico and Canada could target US-made automobiles, agricultural products and chemicals, among others.

The U.S. certainly has the most bargaining power of the group, but exercising it this time would also come at a greater political cost. When Trump demanded a renegotiation of NAFTA in his first administration, inflation was around 2% and mortgage rates were for 30 years at around 4%. Had he chosen to carry out his threats and impose 25% tariffs, American consumers would undoubtedly have absorbed the blow.

In November, Trump was elected by an inflation-weary America. The consumer price index is up about 2.9% from 12 months ago and mortgage rates are still around 7%. As Trump and his opponents know, voters would not take lightly the price hikes on Mexican cars or supermarket products, or the spike in pump prices as a result of tariffs on Canadian oil. Nor would they appreciate continued upward pressure on mortgage rates that may result from signs of resurgent inflation.

America would also have to face another cost. Crime and immigration have been cornerstones of Trump’s policy agenda – more so than trade – and Trump imposing tariffs would undermine his own goals by driving neighbors into economic slowdown or recession, particularly Mexico. America’s neighbor to the south sends about 80% of its exports to the US, and a trade war would drive working-class Mexicans to seek work in America. In a worst-case scenario, it could even increase the participation of drug cartel workers if the formal economy suffers.

Finally, the US risks alienating two great and important allies at a time when the world has become more dangerous, and we would do well to keep our friends close. This is generally outside my remit as a markets and finance columnist. But Hal Brands, a fellow at Bloomberg Opinion and the Henry Kissinger Distinguished Professor at Johns Hopkins University’s School of Advanced International Studies, recently wrote that there is some logic behind the idea of ​​resuming US leadership in the American hemisphere. The problem is that Trump is leading with outlandish threats instead of diplomacy, damaging relations and undermining America’s moral authority.

Even stranger is why Trump hasn’t made China a priority. (One theory: He’s trying to play “good cop” for now as he pushes for a deal to bring TikTok into US hands. I’ll leave it at that, because I have no better ideas.)

Under Trump, tariffs have become a weapon for every problem – economic or otherwise. In some cases, Trump may actually have seen an opportunity to raise revenue. In others, it may be intended primarily to restrict trade flows to protect domestic industry. And in others, he may think he’s using threats of tariffs as leverage to get America’s trading partners to lower their tariffs on us. But in the case of Mexico and Canada, it is not clear that it could achieve any of this without causing significant collateral damage domestically. This leads to the conclusion that this is not really about economic issues but, instead, about Trump’s beliefs on immigration and drug trafficking. “We’re thinking about 25 percent tariffs on Mexico and Canada because they’re allowing a tremendous amount of people” to cross the border, Trump told reporters Monday. According to Brands, these may be grievances that are better handled with cooperation than wild threats. But when it comes to trade and economic issues, it’s hard to imagine how the US will fare through Trump’s latest tariff gambit.

Jonathan Levin is a columnist who writes about US markets and economics. He had worked as a reporter for Bloomberg in the US, Brazil and Mexico.