Donald Trump’s inauguration last week was followed by a flurry of executive orders taking aim at diversity measures, reinstating offshore oil and gas drilling, and withdrawing from the Paris climate accord. Notably absent, however, were the tariffs on China, Canada and Mexico that the President of the United States had mooted throughout his campaign.
Instead, Trump signed a memorandum instructing government departments to construct an “America first trade policy”. This includes reviewing whether China is acting in accordance with its 2020 trade agreement with the US and examining the impact of the United States-Mexico-Canada Agreement (USMCA) on American businesses, workers and farmers prior to its scheduled review next year.
Findings from these reviews are due in April, which could pave the way for new tariffs by late spring or early summer, according to law firm and lobbying group Brownstein Hyatt Farber Schreck. However, the firm also notes that Trump’s inauguration remarks hint at an earlier date of February 1.
In light of this, governments and exporters around the world are preparing for turbulence and working to develop strategies to protect their trade no matter what the president decides.
Plan México or America first?
Mexico, along with Canada, has been threatened with a 25% tariff on all exports to the US in recent months. As the US’ largest trading partner, such a blanket cost increase could wreak havoc on the country’s economy, especially in industrial regions near the border.
However, many of the companies manufacturing in Mexico are US-based, meaning the impact would not be one-sided.
“Supply chains in North America are highly regional, and particularly tight,” says Arantza Alonso, senior Americas analyst at intelligence firm Verisk Maplecroft.
“A 25% tariff on Mexican exports will not only harm the Mexican economy but could backfire on US consumers. By pushing back the imposition of tariffs until February 1, Trump is giving Mexico time to make concessions.”
Concessions are likely to focus on immigration and security, two areas that have been central to US-Mexico trade discussions, Alonso says.
Trump may also seek to renegotiate the USMCA, which is due for review in July next year.
“The word ‘renegotiate’ doesn’t appear in the treaty – it’s a review process – but that’s clearly how the president wants to use this opportunity,” Andrew Shoyer, partner at Sidley Austin, tells GTR.
If negotiations take place, they are likely to touch on Mexico’s growing status as a hub for Chinese exports, as well as continued pressure on the movement of people and fentanyl across the border, Shoyer says.
Seemingly in preparation for potential trade tensions under the new US administration, Mexican President Claudia Sheinbaum unveiled Plan México on January 13. The initiative contains a series of policies aimed at growing the Mexican economy, as well as making it more self-sufficient, aiming to have 50% of domestic supply and consumption within the country.
This is partially a hedge against US tariffs, but also a signal to Trump that Sheinbaum is willing to play ball with his “America first” rhetoric, Alonso says.
“The geopolitics of Plan México are clear,” she says.
“Sheinbaum has heavily emphasised the importance and ‘uniqueness’ of the USMCA. She is at pains to demonstrate to the new US administration that Mexico is committed to clamping down on what Trump deems to be unfair global trade practices.
“The major challenge is convincing President Trump, especially with the question of migrant deportations looming large.”
For US businesses that rely on Mexican imports, planning for the worst scenario is essential, says Gregory Husisian, a partner at Foley and Lardner.
“Make sure you understand where your suppliers and sub-suppliers are, and figure out what the risk points are, and whether you need to be setting up secondary contingent suppliers,” he tells GTR.
“A lot of it comes down to understanding your import patterns, risk planning, setting up alternatives and renegotiating contracts so you can share tariff-related risks, because it’s notoriously difficult to use force majeure and commercial impracticability clauses to try to deal with this.”
However, reshoring is a slow process, and Trump’s unpredictability means companies “are in a bit of a quandary because they can’t actually take concrete steps to cope when they don’t know what they’re coping with”, Husisian says.
A shifting stance on China
Trump’s rhetoric on China has been inconsistent in recent months. During his campaign, the president threatened the superpower with tariffs of up to 60%, but last week told a crowd at the World Economic Forum that “we look forward to doing very well with China and getting along with China”, according to the Associated Press. He is, at the time of publication, reportedly considering a 10% tariff on Chinese goods.
Shoyer at Sidley Austin suggests that China may face less of a direct challenge from the Trump administration than in previous years, as the White House shifts its focus toward reducing reliance on its rival rather than negotiating policy changes.
“I believe the dominant view in the White House is the decoupling view,” he says. “I don’t believe that in this early phase of Trump 2.0 the aim is to try to secure changes in Chinese policy to end forced technology transfer and protect IP in the way we saw over the last eight years.
“My sense is that the prevailing view today is that we need to walk away from reliance on China, and if that means we need to endure a painful transition to re-industrialising the United States and replacing what we rely upon from China, then we have to do that.”
Despite the apparent softening, China – and businesses that rely on its exports – remain on edge. At the country’s Central Economic Work Conference, held in December, the Chinese government outlined its main economic goal for the upcoming year: “to comprehensively expand domestic demand”.
Arjen van Dijkhuizen, senior China economist at ABN Amro, notes in a research paper from mid-January that this might translate into more “direct support” for consumption at home, but that further stimulus will take a “stepwise approach, allowing Beijing to finetune support with developments in activity/sentiment, while keeping part of its powder dry for when more is known about Trump’s tariffs”.
Ensuring the possibility of a rapid response will be vital if Trump imposes even his threatened 10% tariff, as it will have major impacts on the Chinese economy. The Peterson Institute for International Economics estimates that throughout Trump’s second term, China’s GDP growth would be US$128bn lower with tariffs than without.
The US economy would also suffer under a tariff scenario, experiencing a GDP growth of US$55bn lower than currently forecast. But the country would also have the advantage of foresight, allowing the government to better prepare and mitigate the risks.
A growing number of companies are shifting operations out of China, driven by rising costs and the need to de-risk supply chains, which could help some businesses adjust more easily to potential US tariffs.
Not all companies will be so lucky, however. For many, China remains essential.
“What we’re hearing from our clients is they don’t have a plan B for Chinese electronics,” says Shoyer. “If the idea of the Trump administration is to pull all of the industrial activity inside the US borders, that adjustment hasn’t yet taken place. There is concern and anxiety, but no real clear path forward.”
He adds that many companies are hoping to make their case to policymakers to avoid the most disruptive measures, but that doing so will require a strategic approach.
“The challenge is really these different vectors at the same time: Mexico and Canada are one, China is another, Europe and the UK are yet another,” Shoyer says. “It’s going to require a very nimble government relations strategy.”
