"This Week, The Second Trump Trade War Started"

By Philip Marey, Rabobank Senior US Equity Strategist

Tortilla wrap with bacon

This week, the second Trump trade war started. On Monday, there was some market relief after Trump’s announcement on Friday that he would nominate Scott Bessent as Treasury Secretary. However, that changed on Tuesday after Trump made his tariff threats to Canada, Mexico and China.

Mexican President Claudia Sheinbaum did not take long to make her own threat of retaliatory tariffs against the US. On Tuesday she said “if there’s a tariff, another one will come in response.” However, on Wednesday, Sheinbaum and Trump had a telephone conversation that she called “excellent” and he “very productive.” Sheinbaum had assured Trump that migrant caravans are no longer reaching the US-Mexican border and she also said that they had discussed increased security cooperation. US-Mexican security relationships had soured after the US had lured a Mexican drug lord out of the country into US custody, without informing Mexican authorities. This led to a split in the Sinaloa cartel and an internal battle of several months that has left more than 400 people dead.

In contrast, Canadian Prime Minister Justin Trudeau avoided confrontation and on Tuesday he said he had held a “good” conversation with Trump on Monday night shortly after the Truth Social post and that “we talked about some of the challenges that we can work on together.” On Wednesday, Trudeau met virtually with the provincial premiers to discuss a “Team Canada” approach to Trump’s tariff threat and to stress the importance of unity in Canadian reactions to Trump’s tariff threats. To get Michael Moore’s take on an escalating US-Canada conflict, I would suggest his 1995 film Canadian Bacon.

China, which is blamed for not doing enough to stem the outflow of precursors to fentanyl, reacted calmly. On Tuesday, the Foreign Ministry said that the US should “cherish” China’s goodwill over the issue and added that China was willing to continue working together. Of course, the Chinese reaction is likely to be more forceful if the tariffs are actually implemented.

Trump’s beef with Canada, Mexico and China is about fentanyl trafficking and illegal immigration. In his first term, Chinese companies did not only supply the precursors, but also fentanyl itself. Trump was successful in getting the Chinese to regulate the production and sale of fentanyl in China. However, production shifted to Mexico, with Chinese companies providing the chemicals needed to make fentanyl. In 2019, Trump also threatened Mexico with tariffs unless migration was reduced. Mexican President Andres Manuel Lopez Obrador succumbed to US pressure and deployed the Mexican military to the borders.

Immigration was a major campaign theme during the US presidential election and the tariff threat is only the beginning of a likely ambitious effort to stem the flow of illegal aliens into the US. While the President-Elect arguably has a strong mandate from US voters to enhance border security and deport undocumented immigrants, these policies will pose challenges to many US businesses. As we showed in Trump border policy and immigrant labor supply, food & agriculture and construction are especially vulnerable given the high dependency on undocumented immigrant labor. While there are still many unemployed US citizens who could do the work, most of them do not find the jobs that undocumented immigrants do very attractive. Therefore US businesses that depend on immigrant labor should prepare for possible labor shortages.