On 1 February 2025, United States president Donald Trump, just two weeks into office, escalated his confrontational trade stance by “implementing a 25% additional tariff on imports from Canada and Mexico, and a 10% additional tariff on imports from China. Energy resources from Canada will face a lower 10% tariff.” With this , Trump fulfils his campaign promises of economic nationalism. However, in doing so, he risks triggering a devastating trade war that could harm the American economy and destabilise global markets.

While Trump justifies these tariffs as a response to illegal migration and drug trafficking--particularly fentanyl--smuggled from these nations, his economic strategy overlooks the harsh reality: American businesses and consumers will likely bear the brunt of these tariffs, with higher borrowing rates and rising prices. The same working-class voters who supported him will be hit hardest, as tariffs drive up the cost of everyday consumer goods.

Economic impact

Tariffs are, in essence, taxes on imports that are ultimately passed on to domestic consumers and businesses, not foreign governments. While tariffs can alter market share based on the customs duties applied, the resulting increase in retail prices for consumers is often overlooked in the political rhetoric surrounding them. During Trump’s , his administration not only raised the cost of everyday items, from electronics to groceries, but also of up to 300,000 jobs. The new tariffs on Canada, Mexico and China will likely exacerbate this trend. For instance, automobiles, which heavily rely on parts and materials crisscrossing between these countries, will become more expensive. Even the 10% additional levy on Canadian oil is expected to increase energy costs for refineries and businesses reliant on it, a replacement that cannot be found on such short notice. These higher production costs will inevitably push up prices for consumers, making everything from cars to pharmaceuticals more expensive.

Trump’s supporters might argue that these tariffs are intended to bring manufacturing jobs back to the US, but the reality is more nuanced. Companies don’t move production overseas out of preference--they do it to remain competitive by cutting costs. If manufacturing in the US is more expensive than in countries like Mexico or China, businesses are unlikely to relocate without significant government subsidies or tax incentives. Without these measures, companies will continue seeking out low-cost production markets, as they did during the trade war with China.

Retaliation and geopolitical fallout

Trump’s tariff policies have already triggered tit-for-tat retaliation from trading partners. Canada has 25% tariffs on Canadian $155bn worth of US goods, including alcohol, clothing and household appliances. Mexico’s president, Claudia Sheinbaum, has also indicated that Mexico will impose similar measures. Meanwhile, the European Union, which has previously faced such tariffs, is closely monitoring the situation, prepared to respond if Trump extends these tactics to the 27-member bloc.

In the case of China, the situation is even more volatile. China has the ability to retaliate strategically, targeting specific US industries that rely on near-monopoly of Chinese imports and exports. Past examples have demonstrated the effectiveness of China’s retaliation, such as restricting US agricultural exports or limiting access to crucial raw materials.

One unexpected outcome of Trump’s tariffs could be that, despite their differing global outlooks, countries like China and the EU may unite against US economic policies. European diplomats may push for stronger China-EU cooperation to counter the impact of US tariffs, which could reduce US influence and shift the global balance of power.

Trade deficit

One of Trump’s core justifications for his tariff policies is that they will reduce the US trade deficit. However, history shows that this is unlikely to be the case. During the 2018-2019 trade war with China, the US trade deficit actually grew, as companies rushed to stockpile goods before tariffs took effect and production shifted to other low-cost countries like Vietnam.

Similarly, a tariff war with the EU would not necessarily reduce the trade deficit but could exacerbate it.

Instead of bringing manufacturing jobs back to the US, companies will likely absorb the tariff costs, pass them on to consumers or reroute their supply chains to countries not affected by US tariffs. This will not result in fewer imports but rather higher prices for American consumers and a greater reliance on non-US suppliers.

Inflation

Another consequence of tariffs is inflation. By driving up the prices of goods and services, tariffs force the Federal Reserve to maintain higher interest rates, which slows down borrowing and spending. High interest rates hurt consumers and businesses, leading to lower investment, job cuts and economic stagnation. As inflation rises, the US economy will face pressure from both domestic and international sources.

The higher costs from tariffs, combined with reduced demand from foreign markets, could lead to significant job losses in US industries reliant on exports. The US Midwest and South, where agricultural and manufacturing jobs are concentrated, would be particularly vulnerable to the impacts of retaliation from China (and the EU).

Lose-lose game

In the short to medium term, Trump’s tariffs are likely to result in higher debt, increased business costs and potentially job losses. While the aim may be to curb illegal immigration and drug trafficking, these issues might not see significant improvement. Rather than protecting American jobs and businesses, the tariffs could drive up costs for consumers, provoke retaliatory actions from trading partners and harm the US economy in the long run. This could also destabilise global economic relations, which are crucial at a time when international cooperation is increasingly necessary.

A trade war with the EU, for example, may not only hurt US businesses but also create divisions among long-standing allies, weakening the West’s ability to counter threats like China’s economic rise and Russia’s geopolitical moves. Instead of escalating trade tensions, the US would be better off pursuing fair trade agreements and strengthening diplomatic ties with its allies.

In the end, the potential costs of a trade war--economic disruption, job losses, inflation and geopolitical risks on both sides of the Atlantic and across North America--are likely to outweigh any perceived gains. This is a trade war America simply can’t afford.