It started with tariffs, but the trade war is quickly escalating beyond import taxes into a broader tit-for-tat battle.
President Donald Trump’s 25% tariffs on Canada offended leaders there to the point that Ontario fired back by yanking American booze from store shelves.
Ontario Premier Doug Ford even threatened to slap a surcharge on or even pull the plug on electricity sent to three US states, raising the specter of power bill spikes or even blackouts.
That angered Trump so much that he briefly vowed to hit all US imports of Canadian steel and aluminum with 50% tariffs, before cooler heads prevailed.
But on Thursday, Trump told reporters: “I’m not going to bend at all” on Canadian aluminum, steel and auto tariffs. His remarks came just hours ahead of a meeting between US and Canadian officials on trade.
That meeting was “very, very productive,” Ford told reporters after it ended, adding that he felt that “the temperature is being lowered.” Ford said he plans to meet again with US Commerce Secretary Howard Lutnick next week.
Meanwhile, Canada has requested consultation with the World Trade Organization (WTO) over US tariffs on steel and aluminum, the WTO said in a statement on Thursday. Canada claims the tariffs violate trade rules.
It’s easy to see how this trade war can quickly get out of hand. If world leaders aren’t careful, they can get stuck in an escalatory cycle that’s hard to escape.
“This game has exploded into other areas,” said Mary Lovely, senior fellow at the Peterson Institute for International Economics.
‘Of course I will respond’
It’s not just the US-Canada trade fight.
China responded to Trump’s initial 10% tariff hike in February by announcing retaliatory tariffs as well as new export controls and by adding Calvin Klein owner PVH Group to a government blacklist.
The European Union on Wednesday fired back at Trump’s steel and aluminum tariffs by taking aim at American jeans, boats and whiskey, much to the dismay of the US liquor industry.
Asked about the retaliatory EU tariffs, Trump said: “Of course I will respond.”
And then he did.
Trump on Thursday threatened a massive tariff — 200% — on wine, champagne and other European alcohol.
In other words, Trump has retaliated against the EU’s retaliation to Trump’s tariffs.
What if the EU retaliates to that?
Tariffs are ‘Trump’s Windex’
The trade war escalation has alarmed investors, CEOs and economists — not to mention a growing chunk of the American public.
“Is this going to spiral out of control?” Kent Smetters, faculty director of the nonpartisan Penn Wharton Model, told CNN in an interview.
Smetters, a professor at the University of Pennsylvania’s Wharton School, where Trump graduated from, now thinks it’s a “toss-up” whether the US economy stumbles into a recession this year.
The broadening out of the trade war was somewhat predictable.
After all, Trump is applying tariffs, a trade tool, to areas unrelated to trade such as immigration, fentanyl and protecting the dominance of the US dollar. Trump has even floated the use of tariffs to pressure Russia into a peace deal.
“This is Donald Trump’s Windex. He sprays it on everything,” Lovely said, likening the president’s love of tariffs to the dad in “My Big Fat Greek Wedding” who thinks Windex can solve any problem. “Any restraint we had over commercial policy staying in the commercial policy lane is gone. But I do have to say that in this case, the US started it.”
Trade war could heat up further
And Trump has signaled he’s not ending it anytime soon.
Despite growing pushback from Wall Street, Trump has threatened a wide range of additional tariffs, including reciprocal tariffs scheduled for April 2. Those looming tariffs, if they move forward, could trigger further retaliation.
“The last few weeks have reminded us that trade is emotional. Countries can take things personally. And there are big personalities involved these days,” said Christine McDaniel, senior research fellow at George Mason University’s Mercatus Center and a former trade official under President George W. Bush.
Ford, the Canadian politician who threatened to shut off US electricity and briefly slapped a 25% surcharge on electricity exports, has emerged as a particularly vocal opponent of Trump’s trade policy.
Mexican President Claudia Sheinbaum, on the other hand, has taken a different approach. Sheinbaum said Wednesday that her country would wait until April 2 before responding to Trump’s tariffs.
All of this is just adding to the uncertainty facing investors and business leaders.
“Human behavior is very difficult to model and predict. Trade economists had it pretty easy for 30 years. But we don’t have models for this new world,” said McDaniel.
Alarm in the C-Suite
There is growing concern in Corporate America about the fallout of the trade war.
The Business Roundtable said Wednesday that its CEO Economic Outlook Index has dimmed and CEOs have cut their plans to hire and invest.
The vast majority (85%) of CEOs oppose Trump’s approach to trade, according to a straw poll of roughly 100 major US CEOs at the Yale Chief Executive Leadership Institute CEO Caucus.
The Yale event, held in Washington on Tuesday and featuring the CEOs of JPMorgan Chase, Pfizer, American Airlines and other firms, revealed that 94% of CEOs polled are worried tariffs will be inflationary and 85% believe Trump’s tariffs are backfiring.
Jeffrey Sonnenfeld, founder of the Yale Chief Executive Leadership Institute, told CNN that business leaders universally believe there are legitimate reasons to apply tariffs selectively. But Sonnenfeld said CEOs are “angry” over the shifting justifications offered by the administration for Trump’s tariffs.
“The broad-sweeping assault on allies instead of adversarial and rival nations has CEOs dismayed and embarrassed,” Sonnenfeld said in an email.
Of course, it’s too early to know how the trade war will evolve — and what the ultimate impact will be on the economy and financial markets.
Foreign leaders may be reluctant to continue the escalatory cycle so as not to further damage their local economies.
“They understand tariffs are bad for their economies. That could be a natural break in this tit-for-tat,” said Lovely.
It’s also possible that Trump is forced to dial back the tariff pressure if the US economy starts to really weaken or if Wall Street throws an even bigger temper tantrum.
“The president is in a tight spot, and every tariff (or threatened tariff) makes his position more difficult,” Simon Johnson, head of MIT’s Global Economics and Management group, told CNN in an email. “If he keeps going in this direction, prices will rise and the economy will slow even further.”
