Faisal Islam: The tariff wars have begun - buckle up - Voice of Asia

Private messages from the highest echelons of the Canadian political system are: don't mess with Canada. Much like the infamous U.S. Smoot-Hawley Tariff nearly a century ago, Canada swiftly retaliated against Donald Trump's import taxes.

While the White House claimed a diplomatic victory in the fight against fentanyl trafficking, asserting that Canada pledged $1.3 billion (£1 billion) for border protection initiatives, Canada actually conceded little beyond its established plans. Crucially, neither Mexico nor Canada was cowed by the explicit threat in Trump's executive order that any retaliation would result in even higher tariffs on U.S. imports.

After mutual consultations, both Canada and Mexico reached a month-long truce with Trump. This Trump, back in the U.S. presidency, seems to relish issuing tariff threats in numerous directions daily. Since he took office, these threats have also targeted Denmark, Colombia, China, Taiwan, the EU, and all the BRICS nations, including Brazil, Russia, and India.

Trump's rationale for imposing tariffs is constantly shifting, and many aspects of this situation defy logical explanation. Consequently, Mexico, Canada, and all nations facing tariffs or the threat of tariffs must decipher Trump's true intentions. Once they figure that out, the question facing the world is whether what we are seeing is an attempt by the U.S. president to reshape the entire global monetary system, and what risks that entails for the U.S.

Trump's claim that fentanyl trafficking is the legal pretext for imposing tariffs allows him to bypass Congress and use emergency powers to levy border taxes on Canada, Mexico, and China by declaring an "unusual or extraordinary threat." But while discussing the fentanyl trade, he also mentioned Canada's trade surplus with the U.S. (meaning Canada exports more to the U.S. than it imports) and floated the idea that Canada should become the "51st state" of the U.S.

While any country might request negotiations on illegal and legal trade flows, it's difficult to see how to approach these dialogues when a free-trade ally—also a NATO member and one of the G7's most developed economies—faces a parallel threat of continental annexation. Meanwhile, Europe seems reluctant to rock the boat as it tries to discern the president's true motives and how this will affect his decisions on transatlantic tariffs.

Trump's long-standing animosity toward the EU stems from the bloc's substantial trade surplus in goods with the U.S., which is rooted in areas like high-end German car exports. At the heart of all this lies a sense of unfairness, believing that other markets impose more restrictions on the U.S., such as the prices of American medicines or the fines levied on American tech companies. But if this is truly about trade deficits, then why Trump hasn't announced tariffs on countries with even larger surpluses with the U.S., like Vietnam, Japan, and South Korea, remains a mystery.

Regardless, Trump's sole focus on goods means he's willing to overlook the U.S.'s largest export—services. I raised this point with EU Trade Commissioner Maroš Šefčovič last month. He told me: "Of course, we have a surplus in goods, but the U.S. has a surplus in services. And most importantly, €300 billion (£249 billion) every year goes from our pension funds, from the savings accounts of European citizens, across the Atlantic to American companies because they are investing in America. So I think it's a rather balanced relationship."

As Trade Secretary Jonathan Reynolds has pointed out, the UK's trade position with the U.S. is more balanced. In fact, by some measures, the U.S. has a surplus with the UK. Amid the fog of Trump's true intentions, European negotiators have begun to emphasize cooperation, partnership, and deals with the U.S., deliberately avoiding direct criticism, even of the extraordinary suggestion of tariffs on NATO ally Denmark over the fate of Greenland.

In November 2024, before becoming a White House chief economic advisor to President Trump, Stephen Miller authored a paper posing further questions that could determine how much tariff the U.S. should impose on a particular country. These questions included assessing whether a country imposes similar tariffs on the U.S., suppresses its currency, respects American intellectual property, fulfills its NATO obligations, votes against the U.S. at the UN, or its "leaders confront the United States on the international stage."

The paper also talked about forcing other countries "to choose between facing export tariffs on American consumers or facing tariffs on their imports from China," and asked: "Which will they choose?" The president himself was very clear when he addressed a stunned World Economic Forum in Davos, Switzerland, via video in January. "Your choice," he told the assembled international executives. Produce goods in American factories with tax breaks, or import from foreign factories into the U.S. and pay tariffs, which would bring "hundreds of billions or even trillions of dollars" into the U.S. Treasury.

"Most of the world has come to understand that Trump does use tariffs as a negotiating tool," Stephen Moore, a former economic advisor to Trump who recently visited the president, told me. Part of Trump's logic may be very simple: reshape the U.S. tax system so that everything coming into the country attracts taxation, but in return, the public sees a dramatic reduction in income tax rates. "By the way, I do think eventually Trump is going to have across-the-board tariffs," Mr. Moore said.

"He's talked about this, that if you bring stuff into the United States, whether it's from Britain, Mexico, Canada, China, Europe, you're going to pay more, but if stuff is made in the United States, he's going to lower taxes. For many Americans, that's a very appealing proposition." Mr. Moore suggested a universal 15% tariff on all imports to fund cutting income tax rates to 15%.

Miller's paper also contained a proposal that sent shockwaves through global central banks and finance ministries: devalue the U.S. dollar to boost American industry and exports. Arranging this would mean a fundamental change to how the global monetary system operates. But Miller argued that punitive tariffs could be used as leverage to make uncooperative trading partners like Europe and China "more receptive" to the idea.

He suggested that, over time, a summit of the world's economic powers could be held, where allies and rivals would hammer out the dollar's revaluation at the president's Florida residence. It might be called the Mar-a-Lago Accord. Early discussions of this idea in international forums were met with deep skepticism, recalling the history of similar attempts to manage global currency values.

But this is a concept from a recently released top White House economic advisor. Impose tariffs now, impose tariffs heavily, impose tariffs everywhere, in order to get the world to help devalue the dollar in the future. Such a radical idea comes with risks, and even with just tariffs, the White House risks overplaying its hand with America.

Mark Carney, the frontrunner to replace Justin Trudeau as leader of the Canadian Liberal Party and prime minister, at least before an election, has a rather unique approach. The former governor of both the Bank of England and the Bank of Canada has decided to throw punches, mocking the fentanyl justification and telling the BBC that Canada will retaliate "dollar for dollar" and that Canadians will "stand up to bullies."

He said that tariff moves would rebound on the U.S. economy itself by exacerbating inflation, forcing the Federal Reserve to raise interest rates, and undermining America's ability to sign trade deals, as they had effectively torn up their biggest deal—the U.S.-Mexico-Canada Agreement (USMCA)—just a few years after the president personally renegotiated it.

Mr. Carney then publicly suggested that Canada remove subsidies on U.S. oil exports and emphasized that Canada's green investments may need to be protected from U.S. carbon emissions. For countries like the UK trying to avoid tariffs, he had a simple message: "Good luck."

A clear sense is that, based on his own experience dealing with Trump at the G20, the way to deal with him is to show strength. This is partly because mild domestic opposition to these policies in the U.S. will not last. Likewise, the tougher, more strategic, and more coordinated the retaliation, the more food for thought it will give to big American corporations and some within the president's fiercely competitive court.

Elon Musk, the man who usually posts prolifically on his X platform, while also being CEO of electric car maker Tesla, has been unusually quiet about this latest move by the president. He eventually retweeted the Mexican president's message about their tariffs being postponed.

One CEO of a leading American tech company told me that his company is already drawing up plans assuming they will be the recipients of retaliatory tariffs. He hopes that Trump's focus on the rising value of the U.S. stock market will act as a natural constraint on excessive tariffs. Some believe the small dip in the Dow Jones on Monday contributed to this week's pause.

Retaliation is standard procedure in trade wars. Indeed, in what is the most famous of all trade wars, when U.S. Republicans passed the disastrous Smoot-Hawley Tariff in the 1930s, Canada was the first to strike back, even acting before the U.S. had finished legislating. History shows that Henry Ford was one of those who pleaded with Herbert Hoover to veto the Smoot-Hawley Tariff in 1930.

And, in 2025, the auto industry is an obvious potential tariff loser. "There is arguably no Canadian auto industry, U.S. auto industry, and Mexican auto industry," says Peter Frise, a professor of mechanical and automotive engineering at the University of Windsor. "There is a North American auto industry with Canadian, U.S., and Mexican components, and that integration between the three countries is fundamental to how that industry operates."

Not only is a very popular model in the U.S., like the Honda Civic, made in Canada—Professor Frise says that "very few" cars assembled in the U.S. don't contain parts from across the border. Therefore, he says, tariffs "will drive up costs for everybody"—including American consumers.

Another risk for Trump is that, as Mr. Carney and Mr. Šefčovič both said, they are now all responding to the direction of U.S. trade policy by diversifying away from each other. The EU is busy striking trade deals with Latin America. "There is a huge appetite out there for free and fair trade relations," Šefčovič said.

The UK is also restarting trade negotiations with India and the Gulf states. Reynolds said that the "challenging international position" means that the UK must play to its "real competitive advantage" as "the world's most connected market to the U.S., the EU, and China."

The other question here is, if the direction of travel is universal tariffs, as Trump and his advisors constantly suggest, then how much incentive is there to try to avoid it? There are some jaw-dropping ideas circulating within Trump's economic circle. This is the talk of looting trillions of dollars of revenue, and it's scaring even allies who thought they might escape tariffs.

This sounds like a crazy economic gamble. But that's relative when the U.S. president is imposing tariffs on his closest G7 and NATO economic partners over the issue of fentanyl, while claiming it should become part of the U.S. This could be a wide-ranging and surprising tariff war. This week's trade drama is just an early skirmish.