Tariffs Using Emergency Economic Powers Risk Undermining U.S. Economic Security

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Talk has finally turned into action and the first shots of the 2025 trade war have been fired. President Trump has used the International Emergency Economic Powers Act (IEEPA) to place 25 percent tariffs on products from Mexico and Canada (10 percent on Canadian “energy resources”) and 10 percent on all products from China. For all three countries, the rationale for these measures is to motivate action to address the fentanyl crisis in the United States—a pressing economic security priority that deserves immediate attention. However, counter to their intended goal, the tariffs on Mexico and Canada (which have since been delayed by one month) in particular risk undermining U.S. economic security by their direct economic repercussions; their inadequacy in motivating policy change by our partners, and their likelihood of degrading partnerships essential to countering global threats, in particular from China.

Direct Economic Impacts

Over several decades, as a result of the USMCA, signed by President Trump, and NAFTA before it, the North American economy has evolved into a deeply interconnected network, fostering economic integration and prosperity for all three countries. This integration has led to the development of complex, cross-border production processes, particularly evident in industries such as automotive manufacturing, electronics, and agriculture.

Given the level of economic interdependence between the three economies, the IEEPA tariffs will include far-reaching first- and second-order efforts, not just the “short-term disruption” that the president acknowledged. The automotive sector, for instance, relies heavily on parts and components that cross borders multiple times before final assembly, underscoring the seamless nature of regional trade. The Ford Bronco Sport with a 2.0-liter engine may be assembled and imported from Mexico, but its engine and transmission are produced and exported by the United States. On average about 30 percent of an imported car from Mexico is the value added from U.S. workers and firms. Increasing the cost of Bronco by 25 percent will hurt workers through the Midwest and Southeast employed by Ford, GM, and their suppliers. In addition to hitting producers, these tariffs will also raise prices for U.S. consumers. Estimates from the Budget Lab suggest that the increase in prices will be equivalent to a $1,250 per household loss in purchasing power.

Similarly, tariffs will exacerbate vulnerabilities in supply chains. Even as the United States seeks to reduce dependence on Chinese critical minerals imports, tariffs on Canadian imports of uranium, nickel, aluminum, and other critical minerals will undermine U.S. minerals security and the competitiveness of U.S. nuclear energy, heavy machinery, and defense industries. Various macroeconomic estimates suggest that U.S. tariffs on Canada will result in higher inflation and lower growth in both countries. There is a high likelihood that retaliatory tariffs are coming: These will reduce demand for U.S. exports with distributional impacts including in the heartland. The IEEPA tariffs and an ensuing trade war—no doubt stagflationary—will flow through to financial markets, impacting the traditional 60/40 portfolios of most North American public and private pensions.

Can Tariff Threats Deliver Sustained Cooperation on Drug Trafficking?

It is worth asking whether the economic cost of tariffs will be matched by the ostensible benefits—that is, progress in halting the trafficking of fentanyl. The administration deserves credit for focusing attention on the fentanyl crisis. Indeed, fentanyl is one of the most significant public health crises that the partners have ever faced, killing over 70,000 Americans in 2022 alone.

Given the complex nature of drug trafficking, however, efforts to halt the supply of fentanyl require sustained cooperation primarily with Mexico and Canada on targeted law enforcement and likely capacity building for law enforcement operations. The “stick” of stroke-of-the-pen tariffs will not by itself lead to effective implementation to combat trafficking—an effort that needs to be sustained and assessed through time.

Ongoing work between the three countries via the Trilateral Fentanyl Committee aims to strengthen and expand joint initiatives against synthetic drug trafficking. The hope is that accelerated commitments under this arrangement can provide the basis for an agreement and an off-ramp. Such an agreement, were it to materialize by February 4 at 12:01 a.m., may avert a trade war in this instance but it would have come at a very high cost in terms of lost credibility—and if repeated, lost leverage—for the United States. More likely, an off-ramp would likely encourage the administration to use the same playbook in other instances in the future—press reports suggest tariffs on the European Union are on the horizon. Playing the same key on the keyboard does not make for economic statecraft and will only strengthen China’s hand.

Erosion of Partnerships Needed to Counter Threats from China

Creating economic costs without the guarantee of halting the fentanyl crisis, these trade actions will more likely alienate these key allies at a time when collaboration is essential to address the geostrategic and technology competition with China. To secure its own economic interests, the United States will need to orchestrate a complex network of economic and technology alliances with the G7 partners and others in the Western Hemisphere, Europe, and the Indo-Pacific.

The United States needs Canada for core elements of its economic security agenda—for energy security across hydrocarbons and nuclear energy, access to critical minerals, enforcement of export controls on sensitive technologies, and cooperation on research and development and the commercialization of critical and emerging technologies. As Canada assumes the presidency of the G7 this year, there is an opportunity to reaffirm the closest of relationships to ensure it is fit for purpose.

Similarly with Mexico, there are legitimate issues that deserve attention that go beyond the pressing issue of drug enforcement. In its America First Trade Policy executive order, the Trump administration rightly has instructed relevant agenda to assess USCMA prior to the 2026 joint review. But this strategic relationship will be essential for U.S. economic security interests related to supply chain resilience, border security, digital trade, and protection of intellectual property rights.

Where Do We Go From Here?

Rest assured allies and adversaries alike are watching the ongoing tariff dispute play out. While some view the administration’s unpredictability as a source of strategic advantage, the tariff playbook is relatively predictable—“promises kept.” The more interesting question is what the administration seeks in exchange for removing tariff threats: point-in-time reductions in the merchandise trade deficit, relatively narrow noneconomic ends such as fentanyl interdiction, or cooperation on the innovation and commercialization of critical and advanced technologies. If it is the third, then the modus operandi will likely need to change. The United States does not have an absolute advantage across sectors and technologies that will drive growth and security. It needs its long-standing partners, particularly its neighbors.

Navin Girishankar is the president of the Economic Security and Technology Department at the Center for Strategic and International Studies in Washington, D.C. Philip Luck is the director of the Economics Program and Scholl Chair in International Business at CSIS.

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Phil Luck
Director, Economics Program and Scholl Chair in International Business