President Trump’s threats to put a 25 percent tariff on most Canadian and Mexican imports—now on hold for 30 days, pending negotiations with both countries—have overturned the reigning orthodoxy in trade and diplomacy. Unlike his tariffs on China, the tariffs on Canada in particular lack any direct national security rationale. He may be pursuing them because he thinks Canada’s rules on fentanyl precursors are too loose, because he wants to shock the global trade system, or even because it’s his opening salvo in a bid to induce Ottawa to join the Union. But whatever Trump’s true aims are, one thing is clear: the tariffs would affect the nearly half a trillion dollars of goods and services that Americans import from Canada each year and lower near-term living standards up and down the North American continent.
The economic case against tariffs is by this point well-worn: tariffs are taxes that slow productivity and hurt the final buyers of goods. American firms and consumers expecting to purchase things from Canada would immediately face higher prices, as at least some of the tariff’s costs get passed along to them. A tariff on a Canadian car part, for example, might be paid up front by a Michigan importer, but it will likely get passed through to the everyday consumer. That Michigan buyer might also look elsewhere for its supply chain, but with their competition weakened, American (and other non-Canadian) firms might raise prices, too. Whether sticking with Canadian imports or switching to alternatives, American consumers would end up paying more for the same goods (or buying goods they value less) and having less money available for other purchases (or less satisfaction with what they get). Tariffs thus reduce Americans’ real purchasing power.
Along with auto parts, big-ticket items affected by Trump’s tariffs include agricultural goods and raw materials like lumber. Canadian oil exports, which constitute two-thirds of American oil imports, face a rate of 10 percent.
On February 1—prior to the delay agreements—the Tax Foundation, a Washington think tank, estimated that the combined effect of Trump’s announced 25 percent tariffs on Canada and Mexico and an additional 10 percent tacked on China “would shrink economic output by 0.4 percent and increase taxes by $1.1 trillion between 2025 and 2034 on a conventional basis, amounting to an average tax increase of more than $800 per US household in 2025.” The Peterson Institute for International Economics pegged the tariffs’ annual cost to a typical American household at $1,200. “Future waves of US tariffs and retaliation,” PIIE added, “will increase these substantial consumer costs alongside the other economic harms of tariffs: reduced economic growth, a shrinking export sector, and supply chain disruption.”
Some arguments against tariffs can go too far, however. For example, the common charge that Trump’s tariff plan will be inflationary is not fully accurate. Inflation refers to a sustained weakening of a currency’s purchasing power, typically driven by monetary and fiscal policies that expand money supply relative to economic output—too many dollars chasing too few goods, as the country experienced from the summer of 2021 onward. Inflation, while not perfectly uniform across an economy, is an elevation of the general price level.
Tariffs do something different: they manufacture a supply shock that changes relative prices. The resulting price increases do not represent the kind of sustained decline in money’s purchasing power that we saw beginning in 2021, when excess demand drove a broad-based rise in prices.
In fact, tariffs will tend to strengthen the dollar against global currencies, as the president’s pick for chairman of the Council of Economic Advisers (and Manhattan Institute senior fellow) Stephen Miran has stressed. To return to the earlier example, when demand for Canadian car parts declines, demand for Canadian dollars declines, reducing that currency’s value—and concomitantly boosting the U.S. dollar’s. This will partially offset the nominal price increases on some goods in the American economy. But it will also reduce American exporters’ competitiveness, further spreading the economic harm. As Stanford economist John Cochrane puts it bluntly, “Tariffs are a terrible economic policy for lots of reasons. But not because they cause inflation.”
Still, to read Miran’s work is to get perhaps the strongest case for the new tariff barrage. The administration knows that the levies would impose economic costs on the public but believes it can reshape interrelated global systems to America’s long-term benefit. The United States, Trump rightly notes, is a global economic behemoth that has left much of its power potential untapped. Maybe the tariffs would prompt Canada to tighten its fentanyl rules; maybe they would allow for a reset in the global currency reserve system; maybe they would even succeed in adding a star to the U.S. flag. In the short term, though, Americans and Canadians alike would be made poorer by the Tariff Man.
Photo by Joe Raedle/Getty Images