Ripples from Trump tariff threat rocking boats in the neighbourhood

Photo: © Paulus Rusyanto

The prospect of Donald Trump back in the White House imposing heavy tariffs appears to be close to toppling a neighbouring government.

In the past 24 hours, Ottawa has waved goodbye to deputy PM Chrystia Freeland, and there are now reports that prime minister Justin Trudeau is also considering stepping down.

Ms Freeland’s resignation letter to Mr Trudeau made clear that she “found herself at odds” with the prime minister over the “best path forward” in the wake of Mr Trump’s tariff pledge, and her concern that Canada needed to get ahead of the “America First” policy.

She wrote: “Our country faces a grave challenge. The incoming administration in the US is pursuing a policy of aggressive economic nationalism, including a threat of 25% tariffs.

“We need to take that threat extremely seriously. That means keeping our fiscal powder dry, so we have the reserves we may need for a coming tariff war. That means eschewing costly political gimmicks… which make Canadians doubt we recognise the gravity of the moment.”

Just days before stepping down, Ms Freeland warned that the US tariff policy was intended to generate economic uncertainty across other nations. This uncertainty, she told media, would act to impede investment “anywhere other than the US”, leaving questions for suppliers.

Mr Trump has not been too restrained in suggesting his intention is to re-centre US economic power, accompanying pronouncements that if Canada and Mexico need US subsidies, they should become US states; and threats against foreign automotive manufacturers, which he wants to “become American car companies – I want them to build their plants here”.

Despite singling out carmakers, the president-elect has largely kept Europe out of his sights, but this has not stopped the EU seeking to get ahead of any potential trade war.

On the same day Ms Freeland warned that Mr Trump’s intent was to see the US as the only safe haven for investment, the EU established one of the world’s largest trading zones by entering a partnership with Latin America’s Mercosur bloc – an agreement, once ratified, that would be the union’s biggest trade deal to date.

Countries set to benefit are Mercosur’s five permanent members, Argentina, Brazil, Bolivia, Paraguay and Uruguay, seven associate states (Chile, Colombia, Ecuador, Guyana, Peru, Suriname  and Panama) and, potentially, observer members Mexico and New Zealand.

While not prompted directly by the looming US administration – having been in the works for 25 years – the deal’s timing is propitious. EC president  Ursula von der Leyen said: “I know strong winds are blowing in the opposite direction, towards isolation and fragmentation, but this agreement is our clear response.”

There are expectations it will save EU businesses €4bn a year in export duties.

France may have objected, and a date for ratification may still be in the air, but the sense is Europe needs this not to avoid tariffs, but to avoid China rerouting goods away from the US. For many commentators, a deluge of Chinese goods overwhelming domestic suppliers represents a graver danger to European markets than US tariffs.

Anthony Gardner, former US ambassador to the EU during the first Trump administration, told Politico that could mean “a significant displacement effect at an incredibly fragile time, where many industries are barely scraping by”. He added: “That will have enormous consequences, potentially promoting deindustrialisation.”

But, by opening up South America, the hope is twofold: firstly, that the new markets, boasting hundreds of millions of customers, will afford an outlet to European manufacturers; and, secondly, given the vast mineral rich reality of South America – by most accounts far wealthier than North America – Europe will have its own ‘trump’ card to play if forced into making a binary choice between China and the US.