Donald MacKay

This is how it looks when the largest economy in the world is run by a king.

At the beginning of the year, I noted: "[t]his [Trump] is a man with an incredibly tenuous grip on how global trade works, yet he will attempt to wield tariff policy like a weapon to intimidate other countries into doing what he wants them to do. How he treats his allies is particularly important to watch. If he comes out of the gate swinging at Canada and Mexico, as he has threatened, the message will be clear to all. But this is not his first term, and although the US is the world’s largest economy, it is incredibly dependent on these two trading partners: Canada for oil and Mexico for manufacturing capacity. You can’t further cut trade with China without replacing it, and Mexico is that replacement."

On February 1, US President Donald Trump imposed 10% duties on all Chinese imports and 25% on all imports from Canada and Mexico, although the duties on Canadian oil will be 10% and have been deferred to mid-February.

These tariffs impact $1.3 trillion (R24.3 trl) of imports into the US (43% of total imports). This is not protectionism, where at least there are domestic producers who benefit. This is simply a consumer tax. Think of adding a sales tax to half of what Americans buy. If these duties were actually collected, they would add $253 billion in costs to American consumers, but they won't be. Sort of. China learned its lesson from the first trade war and has been working hard on reducing its exposure to the American market, so much so that Mexico is now the largest supplier to the US. Sort of, because the alternative suppliers will usually be quite a bit more expensive. After all, they know prices will rise, so why have it be their prices rising?

Global whack-a-mole

Countries like Vietnam and Cambodia have seen their economies pop as Chinese investment pours in to avoid exactly this. Mexico, too, has benefited from this flood of Chinese cash. No matter how hard Trump tries to whack the moles, for as long as the demand is there, the supply will pop up somewhere else, and it won't be in America.

Imported raw materials, without local alternatives, become more expensive. Some companies will source these materials from other countries, but for many products out of China, there is no alternative able to swap out at sufficient volume or quality. The prices will simply rise. Of course, it is now more appealing to make the widget in a country not impacted by the tariffs and sell the finished product back into the US at a significant advantage. Watch factories close—not the glamorous ones backed by billions in subsidies, but the small factories that will slowly bleed off to other countries. And then the big ones who find that making chips without the right minerals, even with subsidies, is very difficult indeed.

Despite the US being the world's largest oil producer, it, ironically, barely consumes any of its own oil. America mainly produces light, sweet crude oil, while its refineries were built to use heavy, sour crude (such as that supplied by Canada). It is more cost-effective to keep buying Canadian oil, which the US receives at a healthy discount, and then export its own oil, which it earns a premium on (Comparative Advantage 101). The last thing you want is to tax the oil you need but don't produce. When oil prices rise, everything becomes more expensive, and as the last election taught us, inflation is inversely correlated with political support.

I have no idea how these countries will respond, but my guess is China throttles off the supply of unheard-of, but very important critical minerals, and things could get very exciting if Canada turned off oil for even a day.

America's influence has always been about its allies more than itself, so when it sets fire to these bridges, it should not be surprised when its influence wanes. You can't replace soft power with military might (hello, Afghanistan!), but you can replace military power with soft power (Vietnam).

While Trump shoots off one toe at a time, China is locking in its influence, especially in regions like Africa, home to the motherlode of critical minerals. Removing PEPFAR, the US President's Emergency Plan for AIDS Relief, arguably America's greatest success in Africa—a continent hardly packed with fans—at a time when America is in a race against China for those minerals makes no sense.

Millions of Africans are alive because of PEPFAR. Many will die with its removal. I would be shocked if China didn't replace PEPFAR before Trump can be convinced to change his mind. Once gone, that waning influence will not easily return, and that does not bode well for America.

Donald MacKay is founder and chief executive of XA Global Trade Advisors. MacKay has been advising local and foreign companies on global trade issues for more than two decades. X handle: XA_advisors; email: donald@ xagta.com; website: xagta.com. The views in this column are independent of Business Report and Independent Media.

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