BREAKINGVIEWS-Trump's economic trench warfare needs an off-ramp

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Updates to add graphic.

By Antony Currie

MELBOURNE, Feb 3 (Reuters Breakingviews) - Battles of attrition are messy affairs for all parties involved and tend only to occur once other options have failed. Donald Trump seems to want to make them his preferred economic policy. The U.S. president on Saturday imposed tariffs of 25% on Mexican and most Canadian goods - as well as a fresh 10% levy on Chinese imports - sparking tit-for-tat retaliation and global market ructions. Absent a rapid climbdown from his counterparts to the north and south, it's hard to see how he wins.

Sure, he has cited illegal immigration and the illicit fentanyl trade as reasons for his actions. But neither is an easy, one-sided fix - and both are relatively small issues on the Canadian border. His use of emergency powers that impose the costs immediately, rather than through trade policy tools that allow time for negotiations, suggests Trump is more interested in inflicting pain than reaching a solution.

He's wagering that the world's largest economy can weather the ensuing economic fallout better than its neighbours. On paper, that's true. Trump's tariffs alone could reduce U.S. GDP by $200 bln a year, according to the Peterson Institute for International Economics. That's less than a 1% hit. The think tank's estimated $100 billion damage to Canada, though, represents almost 5% of its GDP. The levies, if sustained, will shunt Prime Minister Justin Trudeau's country into recession, per analysts at RBC.

But slapping charges on more than 40% of what the United States imports will pummel Americans, too. Staples like fruit, vegetables and meat will be affected, as will big purchases: a new car could cost $3,000 more thanks to the industry's highly interconnected North American supply chain, per TD Bank.

The retaliatory tariffs pledged by Trudeau and Mexico President Claudia Sheinbaum will make matters worse. And there will be unintended knock-on effects. Canadians are being encouraged to stop buying American goods altogether. Meanwhile, choking Mexico's economy may cause more, not fewer, people to try to cross illegally into the United States.

Markets are starting to price in Trump's aggression: in Asian trading on Monday, the U.S. dollar touched a 20-year high against its Canadian counterpart and strengthened against the peso and euro. But U.S. stock futures also slumped, with Nasdaq futures NQc1 down nearly 3%. Trump warns his citizens there will be some pain but his tolerance for a large stock correction is unclear.

Such downsides argue for a swift resolution to the looming trench warfare. He may yet try to spin any small concessions in the coming weeks into what he can claim is a victory. Even then, Washington's poor treatment of its allies will have long-lasting effects that may reshape markets and trade in more profound ways.

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CONTEXT NEWS

U.S. President Donald Trump on Feb. 1 said he would impose a 25% tariff on imports from Mexico and Canada, with an additional 10% tariff on existing levies on imports from China. Energy resources from Canada will be subject to a lower 10% tariff. The moves take effect on Feb. 4.

The president said he was taking the action, under the 1977 International Emergency Economic Powers Act, to hold the countries "accountable to their promises of halting illegal immigration and stopping poisonous fentanyl and other drugs from flowing into our country".

A White House fact sheet on the tariffs also noted that the U.S. trade deficit in goods with the countries was more than $1 trillion in 2023 and gave no details on what the three countries would need to do to win a reprieve. Trump also said in later comments that tariffs would "definitely happen" with the European Union, but did not say when.

Later on the same day, Canada Prime Minister Justin Trudeau and Mexico President Claudia Sheinbaum each announced that their countries would impose retaliatory tariffs on U.S. goods.

(Editing by Una Galani and Ujjaini Dutta)

((For previous columns by the author, Reuters customers can click on CURRIE/antony.currie@thomsonreuters.com))