The best possible case for Trump’s announced tariffs on Canada, Mexico and China | Viewpoint

Listen to this article

Economic theory is clear on what is likely to happen to a nation when it levies tariffs on its trading partners. If the nation is small, meaning that its actions have no impact on world prices, then the best course of action for such a nation is to not levy tariffs at all. Doing so will make this nation unambiguously worse off.

However, the story changes for a large nation, meaning, a nation that can influence world prices with its own actions. Such a nation may benefit by levying tariffs and hence an argument can be made for setting a so-called optimal tariff. However, even in this case, the putative benefit may be zero or negative (meaning a cost) when we account for retaliation by one or more trading partners who are also large and hence able to influence world prices with their own actions.

The U.S. is clearly a large nation that wields substantial power in many international markets. But so is China, the European Union and, to a lesser extent, Canada and Mexico. What then is the best possible case that one can make for President Trump’s announced tariffs of 10 percent on Chinese imports and 25 percent on imports from Canada and Mexico that are paused for a month? Let us investigate.

The first point to comprehend is that relative to its large trading partners, the U.S. economy is in very good shape with relatively low inflation and unemployment, and relatively strong economic growth. This means that if a tariff war does, in fact, materialize then the U.S. would be in a strong position to manage the downsides. In other words, the argument here is that if, for instance, the U.S. and China fight a tariff war then both nations will lose but China will probably lose more than the U.S. will.

Second and related to the above point is the recent performance of the U.S. stock market. The performance of this market has been great and, in fact, much better than the performance of stock markets in most of America’s trading partners. This matters because tariffs are likely to raise prices in the U.S. and thereby contribute to inflation in America. That said, if the relatively strong economic growth that the U.S. has been enjoying continues then this is likely to exert downward pressure on inflation with the result that, once again, in a tariff war, the U.S. will lose less than its trading partners.

A third germane point concerns the impact of tariffs on the U.S. dollar. It is very likely that the imposition of tariffs will strengthen the dollar, and this will negatively impact U.S. exports. This would appear to be counterproductive to Trump’s stated goal of reducing the trade deficit, but even here there is a potential silver lining. A strong dollar signals economic strength, low inflation, and sound fiscal policies to investors and therefore this may draw in investment into the U.S. from the rest of the world.

When pondering the effects of Trump’s tariffs on China, it is worth noting that the Chinese economy is currently plagued with several problems including, but not limited to, an out-of-control property market, unstable local government finances, and a contracting labor force. In other words, the Chinese economy in 2025 is not as strong as it was in Trump’s first term, and it is now more reliant on exports. This ought to provide the Chinese leader Xi Jinping with some food for thought if he decides to fight Trump with retaliatory tariffs of his own.

Even so, China can materially retaliate against the U.S. if it chooses to do so. Why? This is because China is a salient link in international supply chains and because it continues to remain a big market for many U.S. firms such as Tesla. Both these features can easily be disrupted by Xi Jinping should he choose to do so. In this regard, it is worth remembering that China already curtails the export of rare earth metals to the U.S. and these metals are vitally important in the production of goods such as electric cars and cellphones.

In sum, Trump’s announced tariffs will certainly rattle international markets and America’s key trade partners. However, given the insalubrious state of many national economies, it is possible but not probable that he will come out on top with his announced tariffs.

Batabyal is a Distinguished Professor, the Arthur J. Gosnell professor of economics, and the Head of the Sustainability Department, all at RIT, but these views are his own.