Mariano Browne
Economics and politics are closely related as political decisions often have economic consequences. The reverse is also true. Political strategists pay close attention to a country’s economic performance before an election. A strong economy should be good for the incumbent administration, whereas a poorly performing economy should result in electoral defeat. To quote political consultant James Carville, “It’s the economy, stupid.”
The US economy generally performed well under the Biden administration, growing by 2.4 per cent in 2024 because of strong consumer spending and an expanding job market. Consumer price inflation surged in the post-pandemic recovery period in 2022 but declined to less than three per cent in 2024. Egg price increases, blamed on the Biden administration by Trump, were due to a bird flu outbreak and the subsequent culling of infected layers. This decreased the availability of eggs and drove up prices. Contrary to Trump’s claims, the conservative FT newspaper in its March 7 editorial labelled the state of the US economy “a decent inheritance ...” that “... the president’s chaotic policies are squandering.”
“To make America great again,” President Trump is relying on tariffs (also called customs duties, import duties, and import taxes) as a foreign policy tool, a trade protection device, and a measure to encourage inward foreign investment. The countries currently subject to this onslaught are the US’s closest neighbours, Canada and Mexico, and China, the putative threat to US hegemony. More tariffs are planned after a study of third-country tariffs (expected completion is in April) that will inform a policy of countervailing tariffs.
The 25 per cent tariffs on the US’s NAFTA partners (a treaty renegotiated in 2018 during his first term in office) were reintroduced this week after a one-month postponement. A day later, Trump granted both Canada and Mexico a one-month reprieve on the products covered by NAFTA. The tariffs are likely to cause sharp price rises for inputs used by automobile manufacturers in the US.
This second reversal has left financial markets and investors confused. This was evidenced by the way the stock markets responded to these on-again, off-again tariffs. Investors know tariffs will increase domestic market prices and fuel inflationary pressure. The stock market gains since Trump’s election were reversed this week as the market had its worst weekly loss in two years. The volatility evidenced on the trading floor signals investor dislike of policy confusion. Business understands and will accept risk but dislikes uncertainty. The “unpredictability of tariff carve-outs, reversals and steps against trading partners makes it impossible for businesses to plan” (FT, March 7).
Like all wars, trade wars cause casualties. Tariffs are inflationary. They increase prices without any improvement in the value of the affected product. A previous column noted that the US automobile industry is the largest beneficiary of the NAFTA treaty. Increasing tariffs on automobile inputs will increase the cost of automobiles manufactured in the US.
An analysis by Warwick J McKibbin and Marcus Noland for the Peterson Institute for International Economics (February 4, 2025) concludes that 25 per cent tariffs on Canada and Mexico and tariffs on China would hurt all four countries. Retaliatory measures hurt US exporters.
For example, US grain prices have fallen sharply (corn, wheat, and soya bean) as retaliatory tariffs have been levied on agricultural exports, which have fuelled fears of a glut. Tariffs would hurt Canada and Mexico more than the US, lowering Canada’s GDP by a little over one percentage point relative to what it would otherwise have been. The situation worsens for each country if retaliatory measures are included.
Tariffs cannot stop trafficking in illegal drugs or illegal immigration. Yet, this is the supposed reason for deploying tariffs. They can only force negotiation.
The difficulty is that Trump’s rhetoric and bombast guarantees retaliatory responses. Nationalism is a natural response on all sides. Unsurprisingly, Canadians have been booing the US anthem at international events and boycotting US products. The Mexican public has reacted similarly. McKibbin and Marcus Noland conclude that “... even if these tariffs are avoided, the US has damaged itself reputationally, and its partners may look to diversify their trade and investment away from the US.”
Uncertainty is the key impact. Even unfulfilled threats are damaging. An inconsistent US is an unreliable partner. If the US treats its largest trading partners this way, what is the prospect for smaller states? Policy stability is vital for businesses that rely on exports to foreign markets. It is critical for small countries with limited options. Small states like Caricom’s member countries cannot easily diversify their trade operations away from the US. How will Trump’s unpredictability affect T&T’s relationship with Venezuela?
Caricom countries have addressed some of their development needs by accessing loans from China and using medical personnel from Cuba. Cuban sports coaches have also been influential in improving athletic skill sets. These activities have attracted negative comment from US authorities in the past but not punitive action. This more aggressive US approach should make Caricom governments nervous. Panama’s treatment is a precedent.
What are the alternatives? What are Caricom governments doing to insulate and mitigate the fallout effects from Trump’s measures? Buying time and selling hope, or preparing, adapting and adjusting?
Mariano Browne is the chief executive officer of the Arthur Lok Jack Global School of Business.
