Trump tees up tariff hikes on top trading partners. What’s at stake for California?

WASHINGTON —  When President-elect Donald Trump announced he would impose sweeping tariffs on key trading partners on his first day in office, he signaled a return to a favorite strategy: a reverse carrot-and-stick that applies the stick of dire consequences in order to force countries to give him what he wants. In this case, that means a tougher crackdown on illegal migration and the movement of drugs into the U.S.

The risk of applying this tactic to foreign trade is that the whole U.S. economy is so reliant on the status quo that any miscalculation could have damaging consequences, especially in California and other trade-dependent states.

To some extent, that happened in Trump’s first term, when selective tariff increases set off costly trade wars with China and others.

The fallout from tariffs could have major damaging effects on California’s globally integrated economy, affecting thousands of businesses and many more jobs, consumer prices and choices of goods. And, if trading partners retaliate, tariff increases could hurt the state’s sales of farm goods, electronics, transportation equipment and other leading exports. Mexico and Canada are the top two destinations for California exports, and China and Mexico account for the bulk of the state’s imports.

Even uncertainty over such possibilities can cause havoc in financial markets and raise fears of higher prices, as well as disruptions to vital businesses dependent particularly on Mexico and the Pacific Rim.

Trump posted on his Truth Social site late Monday that on his first day on the job he would impose 25% tariffs on all goods from Canada and Mexico, and also tack on an additional 10% levy on Chinese imports. He said these countries — which are the United States’ top three trading partners — would be paying the price for not doing enough on illegal migration and drugs flowing into the U.S.

“This Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!” Trump wrote.

The reality is that illegal border crossings from Mexico have fallen dramatically in recent months as the Biden administration has tightened up especially on asylum arrivals.

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And U.S. drug seizures along the Southwest border have changed little in recent years, according to Department of Homeland Security statistics.

For years, China has been a major producer of fentanyl coming into the U.S., and Trump said in his post that Beijing has failed to clamp down on drug suppliers as it had promised.

Canada is not a big source of illicit drugs or illegal migration into the U.S., although there has been a sharp increase in unauthorized crossings along the northern border in the last year, driven in large part by Indians. Trump didn’t explain why Canada was targeted, but some analysts said he may be viewing the drug and migration situation as a North American problem.

U.S. stock markets, which had been on a run in recent days, opened mixed Tuesday but ended the day higher, suggesting that investors are familiar with Trump’s playbook and that these three countries could avoid the tariffs if they present a credible plan to curb the drug supplies and secure the borders, said analysts at Capital Economics. Mexico staved off a similar Trump threat over illegal migration in 2019.

But Trump’s salvo just three weeks after the election, plus his frequent campaign promises of hiking tariffs, suggests that he will move more quickly in carrying out his trade agenda than in his first term.

Trump has said he would slap tariffs of 10% to 20% on goods from around the world, and up to 60% on imports from China.

The consequences could be dire for California’s economy, given its heavy trade with China and Mexico.

Imports from China ($120 billion) and Mexico ($62 billion) accounted for a full 40% of the $450 billion worth of foreign products that entered California last year. And Mexico, Canada and China rank as the state’s top three export markets.

Overall, international trade and investment and related commerce employ hundreds of thousands of Californians and are a major economic engine for the state.

At the Port of Los Angeles, China’s share of all cargo, as measured by containers, has fallen to 43% from 57% in 2022. But the Port of L.A., the busiest in the nation, has kept growing in overall volume due to increased shipments from other Pacific Rim countries.

With U.S.-China relations worsening over the last decade, many manufacturers in California, as elsewhere, shifted at least some production and suppliers away from China to other sites in Asia and also to Mexico. But the scale of tariffs that Trump is announcing, whether 10% across the globe or separate duties on Chinese, Mexican and Canadian goods, would be too great for other countries to make up.

Much of U.S. imports from China and Mexico are consumer goods and intermediate parts that go into autos, appliances and other products. Southern California apparel companies have for years been sending clothes to be sewn and finished in Mexico, duty-free. Vehicle components often cross North American borders back and forth several times before final assembly — and tariffs added along the way will mean higher prices for everybody.

Now those long-established supply chains may be in jeopardy as analysts expect Trump to try to remake trade deals with North American partners, among others, using tariffs and the big American economic market as leverage.

“It’s going to be a jolt to the system, and at the end of the day it will be impactful to consumer pocketbooks,” said Rachel Michelin, president of the California Retailers Assn. She said her member companies have been trying to get ahead of higher tariffs by ordering products before Trump takes office.

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“From a California perspective, it’s going to be alarming because the cost of living here is higher,” Michelin said. “We really are pricing people out of living in California.”

In Trump’s first term, China and other countries hit back by raising tariffs on sensitive American farm goods, including soybeans and wine. But overall trade also slowed, with U.S. companies scurrying to file for tariff exemptions and trying to curry favor with his administration for relief.

Jock O’Connell, a California trade specialist at Beacon Economics, said the Trump administration’s trade skirmishes with China in 2017 caused a dramatic falloff in the state’s trade volume. California exporters learned to diversify their markets. This time around, he said, the state may have even fewer options.

“There’s not going to be a lot of political payoff” in helping California, O’Connell said. “Can you imagine [Gov.] Newsom flying to Washington to meet with trade officials in the White House to deal with tariffs?”

Greg Danenhauer, co-owner of Parker Boiler, a manufacturer in City of Commerce, said he still buys some steel and cast iron burners from China, but overall looks to China for less than 18% of his supplies, compared with as much as 25% in 2016. Parker Boiler also buys temperature controls and other products from Mexico.

Danenhauer said Trump’s earlier tariffs on Chinese products actually helped level the playing field for domestic makers such as himself. And he’s not worrying about higher tariffs down the road.

“To me, everybody is panicked about it,” he said. “But we don’t know yet” what’s coming, he said.

Dan Ujczo, a trade lawyer at the Ohio-based firm Thompson Hine, drew a distinction between Monday’s tariff announcement, which he said was “very tactical and transactional, targeted for a specific purpose,” and Trump’s plans on universal tariffs and those aimed at China. The latter “are more transformative or transitional when it comes to global trade,” he said, adding that they are likely to be proposed later and closer to when tax cuts and other fiscal plans are ready.

During his first term, Trump often used threats such as high tariffs to browbeat America’s allies into concessions. On defense policy, for instance, he famously raised doubts about continued U.S. participation in the North Atlantic Treaty Organization; European allies responded by boosting their contributions to the cost of mutual defense.

Chinese imports are already subject to U.S. tariffs of 10% to 25% stemming from Trump’s actions in his first term and which were left in place by President Biden. That helped Mexico overtake China in 2021 as the United States’ top two-way trading partner. Still, the United States’ biggest trade deficit, by far, remains with China, in excess of $279 billion last year, according to the Census Bureau.

Trump’s tariffs announced Monday, if implemented, would almost certainly cause significant disruptions for industries and raise consumer costs for gas, autos and all sorts of other products, possibly reigniting inflation, which appeared to be a key factor in his election victory.

The U.S. imported a total of about $1.3 trillion worth of goods from those three countries last year, and about two-thirds of that amount came in tariff-free, thanks to the U.S. free trade agreement with Mexico and Canada.

Despite that trade pact, experts said Trump could impose the tariffs by using the statutory authority under the International Emergency Economic Powers Act of 1977, which he cited extensively in his first term, including in his dealings with Mexico and China.

Whether tactical or not, the tariff threats could escalate — Mexico already said it could retaliate with counter-tariffs. And some economists warned that Trump’s plans could backfire.

“It’s a reckless grenade toss,” said Michael Clemens, an economics professor at George Mason University who specializes in international migration. “Harming American consumers and workers with a trade war will do nothing at all to address their concerns about immigration and drugs.”