On Monday afternoon, Donald Trump was holding court in the Oval Office, enjoying a moment of calm after days of turmoil in which he had brought Canada and Mexico to the brink of a trade war.
Over the previous dizzying 72 hours, the US president had unveiled 25 per cent tariffs on imports from his biggest trading partners, triggering turmoil in the markets, howls of protest from business groups and new doubts about the reliability of the US among its allies. Alongside this was a 10 per cent levy on Chinese imports.
Hours before the measures were due to take effect, Ottawa and Mexico City were given a month-long reprieve; Beijing was not.
Flanked by Scott Bessent, his newly minted Treasury secretary, and Howard Lutnick, his pick to be commerce secretary, Trump savoured the effect of the opening salvo in the trade battles he promised to fight in his second term in the White House.
“Tariffs are very powerful, both economically and in getting everything else you want,” he remarked. “When you’re the pot of gold, the tariffs are very good.”
Return to trade wars
The chaos unleashed by Trump’s demands brought back memories of the trade battles during his first term in office.
The hardline trade hawks within the new administration, led by Peter Navarro, Trump’s manufacturing and trade adviser, are setting the agenda, with the voices of more cautious officials such as Bessent muted — for now.
While Trump would rather reach deals than plunge markets and the global economy into a tailspin, he is more willing than during his first term to use economic coercion to achieve his goals.
This raises the possibility of high-stakes negotiations not only with Canada and Mexico but also with China, the EU and others, that could easily veer off course.
Trump “wants to rebalance trade, onshore production, and raise revenue. He thinks that the only way to do that is by imposing tariffs”, said Michael Smart, a former US trade official now at consultancy Rock Creek Global Advisors, a consultancy.
Tariff hardliners prevail
Navarro, who was released from jail during the Republican convention last July, has emerged as a key White House figure and the biggest champion of hitting the US’s trading partners with large tariffs, said people familiar with his thinking.
A trade hawk who served four months for contempt of Congress after refusing a subpoena in the probe of the January 6 2021 attack on the US Capitol, Navarro was in the Oval Office on Inauguration day, when Trump first vowed he would slap Canada and Mexico with tariffs in February.
A person familiar with the situation said: “Navarro gets what he wants, he has been more emphatic than he was in Trump 1.0. He is now a major figure and Trump refers to him as ‘my Peter’.”
Another person said Trump would often put Navarro out in public to “scare” people with his maximalist take on tariffs and trade.
Behind the scenes, Navarro has been working closely with Lutnick and Jamieson Greer, Trump’s pick for US trade representative, as they begin to build the president’s trade policy.
Lutnick, who has emerged as a proponent of tariffs despite his Wall Street background, has played a starring role in the back-channel talks with Canadian and Mexican diplomats and officials in recent weeks, meeting Canada’s foreign minister Mélanie Joly at Trump’s Mar-a-Lago resort in December, and Justin Trudeau, Canada’s prime minister, in Poland in recent weeks.
Speaking at an event hosted by Politico on Tuesday, Navarro praised Lutnick and Bessent, calling them the “new blood” of Trump’s economic team.
He also insisted the president’s recent actions were not as “chaotic” as they seemed. “What we’ve seen is a lot of pearl clutching when this was announced, but we’ve also seen immediate results from Mexico and Canada,” Navarro said.
The backlash
As it became clear over the weekend that Washington intended to impose sweeping levies without exemptions — apart from a lower rate of 10 per cent for Canadian oil — the backlash began.
Some of the US’s biggest business groups lined up to warn a North American trade war would push up prices on consumer goods ranging from groceries to petrol and cars.
Almost immediately Canada threatened tit-for-tat tariffs on $107bn worth of US goods, including alcohol, clothing and lumber.
The move caused Trump to double down on his plans. Between rounds of golf in Florida, the president posted social media messages arguing that the US was paying “hundreds of Billions of Dollars to SUBSIDIZE Canada”, adding: “We don’t need anything they have.”
On Sunday and Monday, Canadian and Mexican diplomats and finance ministers scrambled to hold calls with their US counterparts.
Meanwhile, markets started to show signs of strain. US equity futures plunged ahead of the market opening in New York on Monday.
Kevin Hassett, chair of the National Economic Council, appeared on CNBC that morning and sought to reframe Trump’s tariffs as an effort to rein in immigration and drug trafficking, rather than an all-out trade war.
“President Trump was absolutely 100 per cent clear that this is not a trade war,” Hassett said. “This is a drug war.”
The dealmaking phase of Trump’s first big trade confrontation was under way.
The dealmaking
When a White House fact sheet on Saturday accused President Claudia Sheinbaum’s administration of having “an intolerable alliance” with drug cartels and providing traffickers a “safe haven”, Mexico’s leader did not rise to the bait.
Instead she accused the US of peddling its own lethal trade to Mexico by flooding her country with high-powered weapons but then pivoted to proposing dialogue.
After a phone call between Sheinbaum and Trump on Monday morning a deal emerged that was remarkably similar to one reached during the first Trump administration in 2019: Mexico would send troops to the border to stem migration and drug trafficking and the US would drop the tariff threat.
“She did the very best she could, having been dealt a very bad hand,” said former Mexican foreign minister Jorge Castañeda, citing the unequal nature of the bilateral relationship and the reluctance of the Trump team to engage.
Mexico also scored a propaganda victory by being assigned a call with Trump on Monday morning, allowing Sheinbaum to announce an agreement at 9.21am local time just after local markets opened.
The temporary pact with Canada took slightly longer to hatch, but the dynamic was similar.
Politicians in Canada have noted Trudeau offered relatively minor concessions to the US president, including C$200mn (US$139.5mn) in fresh funding and the appointment of a “fentanyl tsar” on top of a C$1.3bn border plan already announced.
“You spend C$1.3bn on the border, which is not even a rounding error. You throw in a couple hundred million, which is less than not even a rounding error,” said John McKay, a senior MP in Trudeau’s Liberal party and co-chair of the Canada-US Inter-Parliamentary Group.
“If you put that in the context of daily trade, which is something like C$2bn a day. It is not really much of a concession.”
But in Windsor, Ontario, a hub of the Canadian car industry linked by a bridge to Detroit, Michigan, tens of thousands of workers still fear their jobs are at risk.
“I don’t feel relief,” said John D’Agnolo, president of Unifor, a union representing Ford workers who build the engines for popular pick-up trucks. “I just worry. It’s only 30 days reprieve, this only means more turmoil for workers and families.”
Where next?
The temporary agreements with Canada and Mexico have a very short lifespan, and Trump could demand new concessions ahead of the March deadline that may be harder to satisfy.
Meanwhile, tensions with Beijing have been increasing since the 10 per cent tariffs on Chinese imports took effect on Tuesday, triggering immediate retaliatory measures against US exports to the Asian nation.
Trump has also threatened to impose tariffs on the EU, raising the spectre of another round of bruising, tense negotiations in a little over a fortnight that will set the tone for the transatlantic economic relationship during his second term.
“The Europeans [have] abused the United States for years and they can’t do that,” he said on Monday. “And they want to make a deal. Let me tell you, in all cases they all want to make deals.”
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