Trump's tariff gambit: How to win a trade war with Mexico and Canada

The White House announced Feb. 1 that President Trump was implementing new 25 percent tariffs on imports from Canada and Mexico, and an additional 10 percent tariff on imports from China. It is an unpopular move, as demonstrated by the earlier letter to Trump from former U.S. Treasury Secretary Larry Summers and former Senate Banking Committee Chairman Phil Gramm (R-Texas), detailing how tariffs will be bad for America and the world, and signed by more than 1,000 economists.

But opposition from globalists and economists does not mean that tariffs might not benefit the U.S. To many, a trade war evokes images of economic chaos. But within the Trumpian playbook, it's a calculated strategy aimed at achieving specific policy goals.

In Trump’s view, the unique economic relationship between the U.S. and its North American neighbors presents an opportunity for the U.S. to emerge victorious. The key lies in understanding the inherent vulnerabilities of Mexico and Canada, both of whom send more than 75 percent of their exports to the U.S. This dependence forms the bedrock of Trump's strategy.

The premise is straightforward: Impose tariffs, and these nations will eventually be forced to the negotiating table. Think of the 25 percent tariffs on Mexican and Canadian goods as an invitation to negotiate, coupled with a ticking clock.

The economic pain inflicted by these tariffs, over time, will become too much to bear. Trump understands that neither the Mexican president nor the Canadian prime minister are thinking strategically, and that attempting to score cheap political points at home by playing hardball won’t work. As anticipated by Trump, it didn’t take long for our neighbors to realize their mistake, and both countries quickly caved to Trump’s opening gambit.

Mexico and Canada are now actively helping to secure the border. That’s round one to Trump, and a masterclass in negotiation. He knows and they know that he has all the leverage.

Trade agreements are not one-off games, they are repeated games where cooperation is occasionally tested. Trump understands that not all countries are equal, and that the payoffs between the U.S. and every other country in the Western Hemisphere are vastly unequal. As a result, Trump can play to win a “trade war” with Mexico and Canada. China, on the other hand, is a more equal "opponent" in the tariff game. When the payoffs are similar between the players, the strategy is different and outcome less certain.

While Trump is not necessarily seeking to cripple the economies of Mexico and Canada, because the United States is the primary market for both countries, the U.S. administration has considerable leverage in negotiations. Trump views tariffs as a tool to extract concessions.

By imposing tariffs, the U.S. can significantly disrupt both nation’s economies, creating an imbalance of power in favor of the United States. This strategy hinges on the long-term economic pain that tariffs will inflict on Mexico (3.6 percent drop in GDP) and Canada (2 percent drop in GDP) versus only a 0.3 percent drop in the U.S. The longer the tariffs remain, the more damaging they become to those other countries' economies, creating an incentive for the governments of Canada and Mexico to seek a resolution favorable to the U.S.

Trump knows he holds a winning hand. It’s equivalent to being dealt four aces in poker. Many experts don’t like to talk about how strong Trump’s hand is because they prefer to lean into basic economic theory, which predicts that tariffs will lead to price increases across the board. But the signees missed the bigger point — economics 101 is also about leverage, game theory and decision-making.

Every student who takes an introductory class in economics is expected to learn more than the basics of tariff theory. Students are also expected to be able to apply what they have learned to real life situations. Our colleagues need to acknowledge that Trump is playing to win a game, even if they don’t like it. Rather than signing petitions, our colleagues should be educating our students on the art of the deal, even if this isn’t the strategy they would have preferred.

Will Trump win? We suspect so, Trump knows when to hold his cards and when to fold them, but there are still risks. In a future round, Canada and Mexico may retaliate with their own tariffs, leading to an escalating war that eventually harms them and the U.S. too. Supply chains may be disrupted during the time it takes to onshore production, and some domestic industries that rely on exports would be negatively impacted. These factors could complicate Trump’s political calculus.

Ultimately, Trump's plan is a calculated gamble. He is betting that the economic pressure applied by tariffs, and the dependence of Mexico and Canada on U.S. markets will force them to the negotiating table and accept not just one deal, but a series of deals that aligns with America First policies. While the long-term effects of this approach are uncertain, the strategy itself is rooted in a clear understanding of the economic vulnerabilities of America’s closest neighbors and a calculation that the U.S. — and Trump personally — have little to lose.

Charity-Joy Acchiardo is a senior fellow at the Civitas Institute, and the director of the Financial Responsibility and Economic Education Program at the University of Texas at Austin, where she is an associate professor of instruction in the Department of Economics. G. Dirk Mateer is a senior fellow at the Civitas Institute, and the director of the Philosophy, Politics, and Economics minor in the College of Liberal Arts at the University of Texas at Austin, where he is also professor of instruction in the School of Civic Leadership.

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