THE ECONOMIST: Shoppers will bear brunt of Trump’s extreme new tariffs

He has actually gone and done it. President Donald Trump had long threatened to impose hefty tariffs on Canada and Mexico, America’s two biggest trading partners.

Last month, when they were first due to take effect, he offered both countries a last-minute reprieve. This time, he was in no mood to play nice.

New tariffs came into effect at 12:01am EST on March 4 local time, when America hit imports from its two neighbours with levies of 25 per cent. For good measure, Mr Trump added another 10 per cent tariff on Chinese goods, on top of the 10 per cent charge he implemented last month, which itself added to tariffs imposed in his first term.

Mr Trump has often professed his love of tariffs, believing they strengthen the American economy and generate revenue for the government. He has mused about levies on everything from cars to semiconductors, and on friends and foes alike. But many investors and company bosses had assumed that his protectionist talk was more bark than bite, and that he would back down again, especially on North American tariffs. Within seconds of Mr Trump’s statement that he was set to implement them, stockmarkets swooned.

The S&P 500 index of large American firms ended the day nearly two per cent lower, its biggest fall this year. And the decline probably would have been steeper but for residual suspicion that once the damage becomes evident, Mr Trump will roll back some of his measures.

If he persists, the tariffs on Canada and Mexico will stand as the most extreme and most dangerous act of protectionism by an American president in nearly a century.

They threaten to blow apart a three-way trading relationship between America, Canada and Mexico that has been one of the world’s most successful examples of economic integration, particularly in the car industry. Some vehicle parts cross America’s borders seven times before reaching final assembly. Business representatives have warned that these will be hit with tariffs each time they cross the border.

Spiralling costs could force some firms to halt production. In Mr Trump’s glib view, the tariffs will coax carmakers to build plants in America. In reality, the disruptions will lead to snarled supply chains and higher costs for consumers. Analysts calculate that the average car price in America will rise by about $US2500 ($4000).

The governments of Canada and Mexico had previously warned that they would hit products from America with their own tariffs, though they now must decide whether they really want a brawl.

Apparently expecting some retaliation, Mr Trump posted on Truth Social, his social media platform, that American farmers should “get ready to start making a lot of agricultural product to be sold INSIDE of the United States”. Pivoting from growing corn and wheat for export to replacing Mexican avocados may be a tall order for America’s farmers.

Contrary to Mr Trump’s belief that tariffs generate lots of revenue, those on Canada, China and Mexico will probably bring in little more than $US100 billion a year for the federal government, or about two per cent of its overall tax take, according to the Tax Foundation, a think tank.

At the same time, much of the cost will be borne by American consumers and businesses. From asparagus to tomatoes and cars to crude oil, Mexico and Canada are major suppliers to America. Prices of these products, and many more, are likely to rise in the coming months.

The impact on manufacturing from the North American tariffs is also likely to be far worse than Mr Trump imagines. America alone will never be as efficient as the regional production networks that have grown up over three plus decades of free trade. The three countries are home to 500m people, a large market. Each brings different strengths to the relationship: Canada has vast mineral wealth; Mexico offers cheaper labour.

Almost as extraordinary as the tariffs on America’s neighbours is the fact that Mr Trump’s newest levies on China have garnered little media attention. His first term in the White House featured disputes with China that ran for years, involved rounds of negotiations and ultimately raised America’s average tariff on its rival to 19 per cent, according to the Peterson Institute for International Economics, another think tank.

Now, not even two months into Mr Trump’s new term, he has more than doubled that, adding tariffs of 20 per cent to all imports from China. The new tariffs extend to products such as computers, toys and smartphones, which Mr Trump had excluded from extra duties in his first term in order to shield consumers from rising prices.

Mr Trump’s first term tariffs also came against a backdrop of strong economic growth, fuelled in part by tax cuts that he signed into law. In recent weeks, by contrast, America’s economic outlook has started to weaken. Surveys reveal that consumers are worried about a resurgence in inflation because of tariffs.

Uncertainties may also be discouraging businesses from making investments. With public finances increasingly strained, the scope for another big tax cut is limited. That leaves the American economy with fewer shock absorbers. And it is about to face a pretty big shock.