Capital Economy, Business and Finance
President Trump appears to be following through on his threat to declare a trade war on his neighbours.
He says he will impose a 25 per cent tariff on imports from Mexico and Canada starting tomorrow, with a possible exemption for Canadian oil.
There are two points worth noting.
The first is a fallacy that could serve as an early test of the American public's willingness to go on indulging Trump’s alternative facts.
One of three reasons he gives for the tariffs (the other two being punishments for cross-border migrant and drug flows) is "the massive subsidies we're giving to Canada and to Mexico in the form of deficits".
A trade deficit is not a subsidy. It just means Americans buy more from their neighbours than vice versa.
Second, the effect is likely to be both inflationary for the US and a net positive in the short term for Trump's new external revenue service.
The question is whether it will pay for the sharp corporation tax cut he wants, in time for businesses to compensate workers for their higher cost of living.
