Trump’s Economic Policy

Episode 1 - Tariffs

14/02/2025

Following US President Donald Trump’s economic policy can seem difficult. America First Trade Policy, Securing Our Borders, Unleashing American Energy, Regulatory Freeze Pending Review, etc. In just ten days, Trump signed more executive orders than his predecessors during their first hundred days! Behind this avalanche of orders, the orientation of the President’s economic policy remains clear. Trump is following the broad outlines of the program he sketched out during his election campaign: Increasing tariffs, halting illegal immigration, reforming the ‘Deep State’,” tax cuts, support for fossil fuels, and deregulation more broadly. Today we begin a series of ‘posts’ that aim to put into perspective the economic consequences of the decisions made by the new Administration. This first post is dedicated to tariff policy.

Tariffs appear to be Donald Trump’s favourite instrument, notably because he can use them most freely. It is also, at least from the President’s point of view, an instrument that allows him to achieve several objectives at once: Rebalancing the United States’ foreign trade, finding new revenue to finance the costly tax cut programme due to expire at the end of the year, or even fighting drug trafficking and illegal immigration.

Initial Announcements 

Invoking the International Emergency Economic Powers Act (IEEPA) of 1977, a federal law that grants him broad powers in the event of a ‘national emergency’, Trump announced as early as February 2^nd that he would impose tariffs of 25% on Mexico and Canada and 10% on China. Until now, the IEEPA had never been used by a President to impose tariffs. In May 2019, Trump had indeed already brandished this threat at Mexico. He backpedalled a few months later, as an agreement had eventually been reached to curb the entry of migrants at the US Southwest/Mexico border.

A few days after threatening Mexico and Canada in 2025, the President granted a one-month suspension of the implementation of tariffs on these two countries, in exchange for concessions aimed at strengthening border security. However, Trump decided to increase tariffs on China by 10%, a much more modest increase, it should be noted, than the 60% mentioned during the election campaign. In perspective, this increase remains for now relatively contained (the average tariff rate on products imported by the United States will rise from 2.5% to 4%) and its effects on inflation and US growth should be low.

What are the Impacts on Growth?

If Trump were to implement his threat against Mexico and Canada, things would change, however. Given the weight of these countries in US trade, the average tariff rate would exceed 10%, a level not seen since the end of the 1930s! Activity in Mexico and Canada would be seriously slowed (an estimated loss, according to Brookings[1], or one point of GDP if the countries do not retaliate and three points of GDP with a retaliatory response of the same magnitude), particular because of to the magnitude of their trade with the United States.

Given the size of the US economy, the effect on domestic growth would be more moderate (a loss of 0.2 to 0.3 points of GDP). However, it can be argued that this effect is underestimated because trade models do not fully account for the complexity of the deep economic integration of the three economies. In the automotive sector, for example, it is not uncommon for products to cross borders multiple times: If US manufacturers had to pay 25% tariffs each time they source from Mexico or Canada, this would increase the price of cars by an average of $3,000[2].

Imposing tariffs on Mexico and Canada would also run counter to the Trump administration’s goal of developing more secure supply chains. It could also push these countries to forge other economic partnerships with countries now seen as more reliable than the United States. Paradoxically, by undermining recent efforts to relocate supply chains to the American region (nearshoring), an increase in tariffs on Mexico or Canada could even, in the medium term, end up benefiting… China!

And What Next?

For now, of course, the President’s goal seems to be to obtain concessions in the fight against drug trafficking or illegal immigration. Perhaps it is also a matter of preparing for a renegotiation of the terms of the USMCA[3] free trade agreement more favourable to the United States. It is therefore far from certain that Trump will impose tariffs on all imports from historical US partners. In the meantime, however, on February 10^th Trump just announced tariffs of 25% on steel and aluminum[4] (about 2. 5% of total US imports in 2024), an increase that will first affect Canada and Mexico!

Campaign statements and the America First Trade Policy executive order signed on January 20^{th  --} the day of his inauguration -- suggest, however, that Donald Trump will not stop there in terms of tariff policy. On April 1^st, he will receive reports allowing him to act using Section 232 of the Trade Expansion Act of 1962 or Section 301 of the Trade Act of 1974 to extend his threats to other countries… The EU, for instance, which Donald Trump has already called an ‘atrocity’ on trade!

… to be continued!

[1] Trump’s 25% tariffs on Canada and Mexico will be a blow to all 3 economies
[2] Eric Levitz (2025), “Is Trump’s trade war with Mexico and Canada over? Why the tariffs might — and might not — still happen”, Vox
[3] US-Mexico-Canada.
[4] In Mars 2018, citing national security concerns, the President had already imposed tariffs of 25% on steel and 10% on aluminum under section 232 of the 1962 Trade Expansion Act.