Trump Tariffs Take Hold

On the campaign trail, Donald Trump said he would levy tariffs on Mexico and China for being the source of the flow of fentanyl and illegal immigrants into the United States. Up until this past week, investors largely viewed the tariff threats as hot air within the negotiating process for fairer trade terms. Not knowing what was behind the scenes, it seems clear that any measures or good intentions to slow the smuggling of fentanyl across the border by China and Mexico in the first ten days of the Trump administration did not materialize. In this week’s column, the focus is on fentanyl.

In his first day in office, Trump issued numerous executive orders, one of which designated drug cartels operating south of the Mexico border as “foreign terrorist organizations,” claiming the “cartels have engaged in a campaign of violence and terror throughout the western hemisphere that has not only destabilized countries with significant importance for our national interests, but also flooded the U.S. with deadly drugs, violent criminals and vicious gangs.”

The U.S. Customs and Border Protection says it seized 27,023 pounds of fentanyl in fiscal year 2023, which was nearly double the 14,700 pounds of fentanyl the agency says it took into its possession in 2022. Fentanyl overdoses caused an estimated 81,083 deaths in the United States in 2023, according to the Centers for Disease Control and Prevention, down slightly from an estimated 84,181 deaths in 2022.

“The tariffs on imports from Canada, Mexico and China send a powerful message that the United States will no longer stand by as other nations fail to halt the flow of illegal drugs and immigrants into our country,” House Ways and Means Chairman Jason Smith, R-Mo., said in a statement.

A significant portion of the fentanyl smuggled into the U.S. through Mexico originates from China. Chinese manufacturers produce the precursor chemicals needed to make fentanyl, which are then shipped to Mexico. Mexican cartels use these chemicals to produce fentanyl and smuggle it into the United States. This complex supply chain has made it challenging for authorities to curb the flow of the deadly opioid.

One could argue this is China’s Opium War on the United States. The Opium Wars of the 19th century significantly weakened the Qing dynasty, resulting in the ceding of Hong Kong to Britain and increased Western influence in China. The widespread addiction to opium in China caused serious social and economic disruption. Fentanyl is a synthetic opioid that is up to 50 times stronger than heroin and 100 times stronger than morphine.

Putting a dollar amount on the fentanyl drug trade is hard to calculate due to the illegal nature of the trade, but according to the RAND Corporation, the illicit drug trade in the United States is worth $150 billion. Worldwide, it reached as much as $652 billion, according to Global Financial Integrity. So, if this were a national GDP, it would be 22nd in the world, ahead of Sweden, Poland and Belgium.

While suppliers in China and criminal gangs in Mexico have been long accused of trafficking fentanyl into the United States, Trump’s tariff order against Canada included a long preamble saying that drug trafficking from Canada is growing. “The challenges at our southern border are foremost in the public consciousness, but our northern border is not exempt from these issues,” the order reads. “Criminal networks are implicated in human trafficking and smuggling operations, enabling unvetted illegal migration across our northern border. There is also a growing presence of Mexican cartels operating fentanyl labs in Canada.”

The new tariff orders against Canada, Mexico and China all contain clauses suspending a duty-free exemption for low-value shipments below $800 that is widely seen as a loophole that has allowed shipments of fentanyl and its precursor chemicals into the United States. Such small shipments often are not screened at ports of entry, allowing shipments of drugs and their ingredients to enter undetected. A Reuters investigation last year revealed how Chinese chemical traders are using the de minimis exception to sneak shipments of precursors into the United States, from where they are conveyed across the border to fentanyl labs in Mexico.

With the war on fentanyl now officially on at a whole new level, what are likely to be the effects on this new trade war? “Most immediately, Americans will see food prices rise. Mexico is the source of around half U.S. fruit and vegetables. Gas prices, especially in the Midwest, may also rise,” says Marc Chandler, chief strategist at Bannockburn Global. “This is more of a slap than a gut-punch for China,” says Louis-Vincent Gave, co-founder of Gavekal Research, via email. “For Canada and Mexico, this is far more problematic. They have spent the past few years totally tying their economies to the United States.” The newly announced tariffs could push Mexico and Canada into recession, and Canada’s Justin Trudeau and Mexico’s president Claudia Sheinbaum just announced their own retaliatory tariffs on U.S. made goods that makes for some fresh market uncertainty in the days and weeks ahead.

The business between the North American nations now exceeds China, totaling $1.8 trillion in 2023. That is far greater than the $643 billion in commerce that the Unites States did with China in that same year. Early estimates on the impact of tariffs on American consumers aside from fresh produce include expected increases for automobiles and auto parts, along with Canadian whiskey and tequila from Mexico and many consumer electronics.

The big question at this point is how Mexico and Canada will respond to waging war on fentanyl production and smuggling into the United States. If there are immediate concerted efforts on the part of both governments, with the assistance of U.S. military assets, the tariffs could be lifted soon and trade as usual restored. The cartels are powerful, financially liquid, weaponized to the teeth and ruthlessly evil. Destroying them or seriously weakening their operations will not be easy, but it is a war America must win.