President Trump started his second term with a flurry of executive orders, including imposing immediate trade tariffs on Mexico, Canada and China. The tariffs are aimed at addressing “the extraordinary threat posed by illegal aliens and drugs, including deadly fentanyl” and “constitutes a national emergency under the International Emergency Economic Powers Act (IEEPA)” according to the . At the eleventh hour, a 30-day stay was put in place for Mexico and Canada.
To help keep up with the fast pace of these economic developments, on February 3 the Kennedy School’s Mossavar-Rahmani Center for Business and Government (M-RCBG) hosted a panel discussion on the ramifications of these tariffs. Moderated by Edoardo Campanella MPA 2014, senior global economist at UniCredit Bank and research fellow at M-RCBG, the panel featured Elaine Buckberg, senior fellow at Harvard University’s Salata Institute for Climate and Sustainability and former chief economist of General Motors, and Jason Furman, the Aetna Professor of the Practice of Economic Policy at vlog.
We share highlights from the conversation below, lightly edited for clarity and length.
On the strategy of tariffs on Mexican, Canadian, and Chinese goods
Elaine Buckberg: I would say it’s a combination of at least three major things. One is the “Make America Great Again” slogan. There’s a political romance around revitalizing American manufacturing in this bygone era of large numbers of high-wage manufacturing jobs for workers without college degrees. I say a political romance, because not all manufacturing jobs are high wage, and there have been a lot of challenges in recruiting people to manufacturing. Not all workers necessarily see it as so attractive.
The second thing is about negotiating wins and demonstrating that you are doing something, and President Trump is doing something with his self-claimed deal-making prowess. So, with respect to Mexico, on which there’s now a 30-day stay, those negotiations are primarily about fentanyl and immigration. With China, I think they’re primarily about fentanyl. Frankly, I’m quite unclear with respect to Canada what the negotiating objective is.
Third, I think President Trump really believes in tariffs as a source of revenue. But let’s make a few other high-level points. First of all, the auto industry is the most visible and politically resonant aspect of manufacturing. If you look at imports from Mexico, Canada, and China, vehicles are the number two imports. If you included the auto supply chain, I think it would be rivaling oil and gas for number one. This will be incredibly disruptive to U.S. auto manufacturing and North American manufacturing, which going back to the mid-1990s and the negotiation of NAFTA, has really been effective.
When USMCA [United States Mexico Canada Agreement] was negotiated, and the U.S. International Trade Commission issued a report about it, they said that a typical component had parts that had crossed the borders between the U.S. and Mexico, and between the U.S. and Canada, seven times before actually going into a vehicle that’s assembled. These tariffs will be charged every single time a part crosses the border, with no drawback or credit for re-export or content that’s been tariffed already. It will definitely be inflationary. [Former Federal Reserve Chairman] Ben Bernanke wrote a seminal paper that said uncertainty is bad for private investment and that investors will delay investment in the face of uncertainty, and therefore, it’s also bad for growth. Having sat in top level meetings at General Motors during the China trade wars, I can say it’s definitely true.
If I were back at GM today, I would be running a ton of different scenarios, and I would expect to be doing so for a long time, as I think this will be a volatile thing. If these tariffs are put on and they last, I expect to see a lot of distress at auto suppliers, and also potentially at auto plants in the U.S., because there’s so much disruption to the supply chain and to the costs, and suppliers may not have the financial wherewithal to withstand big increases in their costs.
If we see plant stoppages, that could make the Trump administration question their own policies of putting on tariffs, because if you have suppliers or plants in a wide range of states and congressional districts experiencing visible shutdowns, it could be very politically difficult to sustain the tariff policies.
Jason Furman: There are maybe 10,000 members of the American Economic Association. I assume Elaine is a member. I am. There is probably one economist you could have found to debate the other side of this topic, and maybe not even one. What you’re going to hear is that most economists agree on these things.
The way President Trump thinks about tariffs, I think, is benefit-benefit. One benefit is you’re raising additional revenue. A second benefit is that you’re increasing jobs in manufacturing and reducing the trade deficit.
You’re also getting another benefit of this leverage in a negotiation; that’s the way he sees it.
Sometimes trade restrictions can be cost benefit, and then you have to ask, “Do the costs outweigh the benefits or vice versa?” When we put sanctions on Russia, for example, no one said that was going to make America great again, return manufacturing jobs to America, help American consumers afford things. There were no economic arguments made for that. In fact, in the Biden administration and the Obama administration, we had done sanctions too, acknowledging those actually did impose a cost on families, and they did have downsides for Americans, but then they argued there is a benefit in terms of national security, either deterring invasions, reducing the Russian war machine, punishing them, or whatever it is.
I think in those instances, their judgement, and I would agree with them, was that the cost to Americans was really quite small. The benefit for national security was quite meaningful, and so it was worth doing. But you could do a different cost-benefit calculation.
There’s a final way of looking at it that I think might be the appropriate one for viewing this latest round of actions, which is cost-cost. Elaine has done some work on economic costs, and she talked about the auto industry, not because she worked in it, but because that really is the biggest place you’re going to see effects. In terms of prices for consumers, there have been estimates of an extra $3,000 per car. In terms of jobs, you’ve seen it in the stock price of the auto companies.
Some of this is trying to cure the trade deficit. First of all, the trade deficit isn’t inherently a bad thing. Moreover, even if you’re troubled about a trade deficit, the thing to understand is the biggest exporters are also the biggest importers. Boeing is a huge American exporter. How does it make planes? By importing tons of stuff, tons of parts, tons of steel. You reduce Boeing’s imports by putting tariffs on them.
You’re going to reduce Boeing’s exports of jets. And there’s macroeconomic logic and movements of exchange rates that help bring this about. You look at something like steel, and the steelworkers went out and said, “These tariffs are great on steel. We really want them on steel, but don’t do them on oil,” and the reason is because there are unionized steelworkers that work in American oil refineries that process the oil from Canada. For the steelworkers, the expensive oil was going to hurt their refinery jobs, but the expensive steel was going to help them.
Senator Grassley, Republican from Iowa, called it out: “These tariffs are great, but why are you doing them on potash? Our farmers use potash from Canada. We don’t make it in the United States. It’s just going to make it more expensive.” So, everyone has their thing that goes up in price and it goes through the supply chain, so it doesn’t help jobs, it doesn’t help the trade balance. It certainly hurts economic growth and inflation. It depends on whether the Fed is more worried about the hit to growth or the increase in inflation. That’s the cost-side economically.
Then in terms of national security, it’s not my expertise, but it’s sort of hard to understand what’s going on here vis-a-vis Canada especially. There are 20,000 tons of fentanyl stopped at the border per year coming from Mexico. There are 20 tons a year stopped at the border with Canada.
So, to summarize, I think the president thinks of it as benefit-benefit. I think sometimes things are cost-benefit, and it’s worth paying a cost to negotiate on a goal. I think here, it’s probably cost-cost.
On whether politics or economics are at play
Buckberg: I think that volatility in U.S. policy in recent decades across administrations has impaired trust in the U.S., not just with Canada but also, for example with Europe and other countries’ policies that swing one way and another, as our two parties have become farther apart and policy under different administrations has become less consistent, has made it harder to make long-term plans with the United States.
Edo Campanella: In my view, and as a European, I think Trump’s time horizon is not 2028, the next presidential election, but 2026, the midterm election. He wants to retain control of Congress. Strategically, there is nothing worse, in my opinion, than adopting highly inflationary policies now that can basically explode next to the election, and to compromise his control of Congress. So strategically, it’s better to make a bold announcement as he’s doing now, just to show that he’s keeping his word.
Furman: Much of this isn’t economics. It’s politics. So the tariffs on Kentucky bourbon (during the first Trump administration) or things like that were not devised by an economist. That idea is how do you maximize the pain to the other side while minimizing it to yourself?
The Canadian people are just collectively, unbelievably livid. They cannot understand this, for good reason. I can’t understand why they’re being targeted in this way.
People are talking about this causing a recession in Canada. People are talking about it taking a half point off growth in the United States, so we matter much, much more to Canada than Canada matters to us, so there is an asymmetry here. This is what President Trump is counting on. It’s still quite negative for us.
On the consequences to the American economy of a potential “universal” tariff
Furman: The most important consequence is the same as with these other tariffs, which is that it will shrink both imports and exports. You put a tariff on imports. People want to buy less stuff from Europe and Japan, so they want to buy less euros and yen, so the value of euros and yen goes down, the value of the dollar goes up. What happens when the value of the dollar goes up? American exports are now more expensive, and so we’re exporting less. And so, if you did a 10% across the board tariff, it wouldn’t actually be a 10% increase in prices. It would probably be about a 5% increase in prices, because the dollar would probably strengthen by 5%.
But the flip side of that is you’re not bearing the full cost of the tariff, you are hurting your exporters and, by the way, giving a wealth windfall to people that had assets in the United States, foreigners, that are now more valuable. Moreover, if there’s foreign retaliation, then you might not even get that 5% appreciation.
This type of universal tariff is basically a way of shrinking both imports and exports, and consumers benefit from imports in terms of prices, variety, and the like.
Buckberg: If you had tariffs that are truly universal and mount over time, companies might make plans to bring into the U.S. more of their production and/or supply chain, but they wouldn’t be able to do so without careful planning, as opposed to disruption of immediate tariffs. Presumably, you legislate it so it actually counts in your fiscal accounting, but you’re giving up the whole negotiating leverage aspect that President Trump appears to be using. So, if you think about the auto industry, right now, autos made in the U.S. or elsewhere in North America are really hit, because their supply chains are affected, even if the auto was actually manufactured in the United States.
But vehicles being imported from Korea, Japan, and Europe are still coming in at either a 2.5% tariff in the case of Japan and Europe, and no tariff in the case of Korea, because we have a free-trade agreement and they’re not experiencing disruptions. In addition to Jason’s point about giving up some of the benefits of comparative advantage, you also would probably start giving up some of the benefits of economies of scale, as onshoring some things might mean smaller production, production on more different continents, and more different countries that would drive up cost.
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The conversation, , also included discussions on semiconductor manufacturing, electronic vehicles, and the wisdom of recognizing some countries are better in some industries, the clean energy space for example, that the United States. For additional vlog insights into tariffs, our Center for International Development created this roundup to better understand the global impact of these policies.
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Banner photo by Geoff Robins/AFP/Getty Images; Headshots courtesy of Elaine Buckberg and by Drew Angerer/Bloomberg/Getty Images