Trump tariffs to deal devastating blow to Canada and Mexico: Harvard professor Robert Lawrence

The Trump tariffs are here. US President Donald Trump's new 25 per cent tariffs on imports from Mexico and Canada came into force on March 4, a move ace investor Warren Buffet has likened to an "act of war".

Robert Lawrence, Professor of International Trade at Harvard Kennedy School, explained in an interview to Moneycontrol that the basic premise of reciprocal tariffs is flawed and that Americans will end up paying as much for the increased tariffs because of US’ dependence on Canada and Mexico.

“It turns out that many of the goods that are imported into the United States tend to be purchased by poorer Americans. So this isn’t just a tax measure - it’s actually a regressive tax measure and the estimates are that a typical American household could find its consumption bills going up by on the order or $1500 to $4000 a year – so it would be a significant impact on the cost of living," Lawrence said.

Moreover, in the first round of tariff hikes under Trump 1.0, “it was Americans who paid the higher tariffs" he said.

"... well, if your imports become more expensive, your price levels will increase and that is going to impact in the short run your inflation. So it's reasonable to expect that if these tariffs are imposed, the price level will rise in the United States,” he added.

The United States has a deep supply chain with Canada since the free trade agreement in the mid-90s.

The North America Free Trade Agreement (NAFTA) was implemented in 1994 to liberalize trade in goods and services and remove barriers to investment, making US, Canada and Mexico more economically interconnected.

American auto majors have planned their strategies on a regional basis. “So Ford or General Motors - they will typically make their smaller cars in Mexico, some large cars in Canada and they’ll make other cars in the United States. They’ll bring in parts from Canada to the United States. Now put barriers on the border of the nature of 25% tariffs on the movement of these products and you can see that that’s going to devastate these firms. These are American automobile firms who are going to have an adverse effect," he said.

The United States is a net exporter of oil but it also imports a lot of oil from Canada. It imports what is called "Sour Crude" oil, US refineries are set up to use the Sour Crude oil from Canada.

“Something like 40% of all of our oil imports come from Canada. It's very noteworthy that while the US said it's going to put a 25% tariff on all imports, it said when it comes to energy, it's only going to be a 10% tariff. And that's because these refineries are, in the short run, going to find it very difficult to operate and to find alternative suppliers to bring in the necessary crude that they have to have to operate their refineries,” added Prof Lawrence.

He said that in a world where no single product is completely made in one country, American firms could find it a challenge to stay competitive.

“Today, products are not made in a single country, they're made in the world and are carried out in different countries. What is going to happen is that a large number of American firms are going to find that they only have access to expensive inputs and be less competitive in world markets. We've seen over the last six months a strengthening of the dollar. That's also going to hurt American exporters. It may partially offset some of the effects of the tariffs in the sense that imports would be made somewhat cheaper by a stronger currency," he said.

The Harvard professor added that when it comes to exports, the tariffs will end up hurting American firms. "Other countries are not going to sit back and say, oh, it's fine, America can raise its tariffs, it can violate its previous trade agreements, and we're going to do nothing. What the other countries are going to do is to retaliate against American products. So that's another adverse effect for American exporters," he said.

Lawrence added that the tariffs will deal a big blow to countries like Canada and Mexico, who rely heavily on exports to US.

"Now, America isn't a very open economy. Imports don't account for a huge share of exports of the US's GDP. America is in a reasonably good position to withstand this trade shock. But there are other countries around the world. If you take Canada and you take Mexico, some 80% of their exports go to the United States. So for Canada and Mexico, this is a devastating blow if the tariffs are actually implemented," he said.

Read the full interview