The end of a Republican project - The Collapse of a Common Market

 Import tariffs are a legitimate tool used by states to correct economic imbalances. All countries use them in one form or another, even if some, including the U.S., have chosen not to apply them to certain trading partners.

The European Union operates as a common market, with zero tariffs on internal trade. Imports from outside the EU are taxed by each member state based on the type of product or service. Similarly, the U.S. created a common market with Mexico and Canada through the North American Free Trade Agreement (NAFTA), initiated by Republicans in 1988 (Ronald Reagan) and expanded in 1994 (George Bush sr.) and 2020 (by Donald Trump himself). The North American market became the third-largest in the world, after ASEAN and the EU.

The sudden introduction of 25% tariffs on imports from Canada and Mexico for almost all product categories has led to the collapse of this common market, built by Republicans over decades.

Before NAFTA

The Trump administration’s decision does not mean a return to the pre-NAFTA situation. The impact is much deeper.

Before NAFTA, the U.S. imposed high tariffs on imports from Mexico (20-50%) and Canada (10-40%), differentiated by product categories to protect certain economic sectors. However, with NAFTA, the economies of the three countries became interdependent, especially in industries like automotive, where parts and components move between the three countries during assembly.

The structure of international trade has changed radically compared to the pre-NAFTA era. Today, finished goods represent only a third of global trade, surpassed by services and intermediate goods. Undifferentiated 25% tariffs risk disrupting supply chains, not just markets.

Canada has announced it will impose symmetrical tariffs, and Mexico will likely do the same. The result will be market instability but also increased state budget revenues.

Beyond North America

The first wave of tariffs affects not only North American trade but also China. The 10% tariffs on China, imposed during Trump’s first term, have been doubled. China has announced it will respond similarly. Imports from the EU will also be taxed at 25%.

Some analysts believe these tariffs are just a negotiation tactic, and real discussions about rates and product categories could take place in the second half of the year. This approach is unusual in international relations, where negotiations typically occur before drastic measures are taken.

Why Tariffs?

The U.S. has a growing trade deficit, reaching a trillion dollars annually. Public and external debt have increased significantly, although other developed countries are in similar situations.

The dollarization of the global economy has made it easier for the U.S. to manage its external debt. However, the launch of the euro and attempts by Russia, China, and India to dedollarize could create problems for the U.S.

The trade deficit is a symptom, not a cause. Import tariffs, especially undifferentiated ones, do not solve the structural problems of the U.S. economy, such as declining industrial competitiveness and high wages. Creating jobs through tariffs is a difficult task, given the limited labor force and high wage costs.

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Understanding Trump’s tariffs