Trump makes fateful wager by testing his lifelong faith in the power of tariffs

(CNN) — Donald Trump just took the biggest gamble of his young second presidency.

His hammer-blow 25% tariffs against Canada and Mexico that hit at midnight dealt a fresh shock to an economy showing alarming signs of slowing growth and rising inflation – a perilous mix for any president.

Trump also doubled an additional tariff on all Chinese imports to 20%, in a trio of decisions that sent stocks – a cherished metric of his own performance – tumbling. The timing was inauspicious, before Trump makes a joint address to Congress Tuesday evening that will be watched by a nation nervous about stubbornly high housing and grocery prices. But to the narrower audience of his most faithful supporters, who show no sign of peeling away, Trump is likely to bill his new trade wars as proof of resolve and commitment to his populist promises.

Trump’s decision to press the button, after previously delaying the duties on US neighbors a month ago, reflects a duel between his political heart and his head.

The often-volatile president has seen tariffs as an almost supernatural economic tool since his deals as a real estate mogul in the rip-roaring 1980s. Alongside immigration, the conceit that foreign nations are constantly ripping America off forms the foundation of his political career.

“It’s going to be very costly for people to take advantage of this country. They can’t come in and steal our money and steal our jobs and take our factories and take our businesses and expect not to be punished,” Trump said Monday. “And they’re being punished by tariffs. It’s a very powerful weapon that politicians haven’t used because they were either dishonest, stupid, or paid off in some other form.”

Markets react badly to Trump’s moves

Until the final hours of Monday, investors hoped Trump would take an off ramp. Earlier, Commerce Secretary Howard Lutnick told CNN that Mexico and Canada had done a “nice job” on limiting illegal border crossings into the United States but needed to do more to halt the flow of fentanyl – raising expectations of another possible tariff pause, as happened a month ago after both nations strengthened border security.

But Trump’s fateful move to go ahead with the tariffs sent stocks on a plunge: The Dow dropped 650 points Monday, after he made his intentions clear, and was down by an additional 600-plus points as of mid-morning Tuesday.

“The market was expecting something to happen that would mean that the tariffs wouldn’t be implemented … it comes on top of a strong whiff of stagflation – meaning lower growth and high inflation that has been apparent in a number of data releases and as we know tariffs will just accentuate the smell of stagflation,” Mohamed El-Erian, president of Queens College, Cambridge, told Richard Quest on CNN International.

Trump’s decision to launch full scale trade wars with America’s neighbors is a landmark moment in his second term and is just the latest occasion when he’s stuck to his sweeping campaign trail promises despite the enormous disruption that honoring his word entails.

And it’s a reminder of the ambition underlying his return to the White House – and to what he considers unfinished business. If the tariffs endure, they will underscore his determination to follow through on goals he was talked out of in his first term by establishment political aides.

Now, he’s trying to remake the world on multiple fronts.

Before escalating his effort to overturn the world free trade system and decades of globalization, Trump cast doubt on US security guarantees that underwrote the transatlantic alliance since World War II. And his effort to gut US federal agencies alongside Elon Musk is an attempt to obliterate the domestic governing order and career civil service that prevailed through many presidencies of both parties.

Trump’s faith in tariffs survives every warning by economic analysts that consumers rather than rival trade powers will pay for them.

Tariffs – a device used for generations earlier in America’s history but that was largely phased out in the 20th century – are stamped in the DNA of Trump’s “America First” movement. Their implementation against Canada mirrors the worldview behind his eruption at Ukraine’s President Volodymyr Zelensky in the Oval Office last week. For Trump, all foreign policy is a monetary transaction in which the United States is either winning or being taken advantage of. This mindset precludes the idea that America has friends or allies with common interests. Instead, his use of tariffs to try to wring concessions from Mexico and Canada on immigration shows that his White House views them not as an exclusively economic tool but as part of a deeper national security arsenal.

Canadian fury

Trump’s turn against neighbors – with whom he clinched an updated North American trade deal in his first term – has fractured bonds that run deep.

It threatens to pitch Canada, long a faithful friend and half of one of the world’s most profitable trading relationships, into a recession and to cause steep job losses. This, as well as Trump’s suggestions that the Great White North become the 51st state triggered fury north of the border and widespread boycotts of US goods.

Canadian Foreign Minister Melanie Joly promised Monday that the Ottawa government was “ready” with $155 billion worth of tariffs on US goods – including a first tranche worth $30 billion. Mexico is also vowing to respond, raising the prospect of prolonged economic warfare unless Trump steps back – perhaps with a concocted claim of victory before the new tariffs have had time to seriously damage the regional economy.

Trump has placed himself in a political box. If he imposes tariffs, he’s playing with fire. If he doesn’t, everyone will think he’s always bluffing, and he’ll dent his own economic leverage.

Even if he relents, Trump’s constant threats are darkening an unsettled environment for investors and consumers.

For all its legendary resilience, the US economy is flashing weakness. Consumer confidence is tumbling along with consumer spending. The Atlanta Federal Reserve’s GDPNow model on Monday projected a 2.8% decline in growth for the current quarter.

So, Trump – who is also promising reciprocal tariffs on most global imports next month –could be playing with economic fire.

The risk is especially acute since voter frustration with high housing and grocery prices helped elevate him to victory in last year’s election. Failing to fix those problems – or exacerbating them with tariffs on lumber and agricultural goods – could cause a backlash, especially for Republican lawmakers in next year’s midterm elections. In a CNN/SSRS poll published Sunday, 52% of respondents said that Trump had not paid sufficient attention to the country’s most important problems.

Trump is testing a lifelong belief

Trump’s rationale for wielding tariffs is that decades of free trade policies and steps like bringing China into the World Trade Organization hollowed out US manufacturing and sent millions of US blue collar jobs abroad. He’s not wrong – although those policies also raised US living standards with a flood of lower priced imports. And Trump believes that re-erecting trade barriers will bring those jobs and factories back.

“As an example, North Carolina … I used to go there to buy furniture for hotels, and it’s been wiped out. That business all went to other countries. And now, it’s going to come back into North Carolina,” the president said on Monday. To drive home his point, he appeared in the White House Monday with the CEO of Taiwan Semiconductor Manufacturing, who pledged to pour $100 billion into chip manufacturing in the United States.

But with less than four years left in Trump’s term, will businesses undertake the expense and disruption of locating plants from lower wage economies abroad? And even if they do, the higher costs of labor, materials and transport in a developed economy could mean higher prices in stores.

Democrats, who’ve struggled to respond to Trump’s shock and awe, suddenly have an opening.

Massachusetts Sen. Elizabeth Warren, who has sometimes advocated tariffs as part of a wider economic strategy, warned that the prospect of inflation would dampen Trump’s address on Tuesday. “Notice the fix this puts him in,” the Democrat told CNN’s Kasie Hunt on the inaugural edition of her new show “The Arena.”

“Remember, he (was) saying on day one he would lower prices for American families, on day one,” Warren said. “After he gets elected, he said he got elected based on grocery prices and his promises – now we’re six weeks in, he’s done nothing to lower prices. And, in fact, it looks like inflation is going up. With these tariffs, we know that costs will go up for families.”

“So, he’s exactly upside down from his promise.”

Warren’s comments highlighted Trump’s gamble. There’s no way that importers can bear the cost of tariffs of 20% or 25% without passing them onto consumers. And when tomatoes, and fruit and gas and alcohol shoots up in price and new cars are suddenly out of reach, his lifelong and untested faith in the magic properties of “beautiful” tariffs could crash headlong into reality.

This story has been updated with additional developments.

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