Trump isn't backing down from his tariff tough talk: 'We have to take it seriously'

President-elect Donald Trump’s tariffs threats are just that — for now. But businesses could face new costs as soon as next month if he sticks to his guns.

Although his ideas have frequently varied in scope and size, Trump has floated general tariffs of up to 20% on imported goods, as well as up to 60% on China. In recent weeks, he’s threatened Canada and Mexico, the nation’s top trade partners, with 25% tariffs and China with 10% tariffs unless they meet his demands regarding illegal immigration and the flow of fentanyl into the U.S.

“It’s a lot, and we have to take it seriously,” Chandri Navarro, senior counsel at Baker & McKenzie’s international commercial and trade practice, said of the myriad proposals. “Because those are the kinds of threats that he made prior to his first administration, and then he actually did put them into effect,” barring some exceptions.

“It has to be taken seriously,” she added. “When he made those threats, a lot of us thought it was bluster and that there’s no way that he would put these into effect — but he did.”

In 2018, Trump ordered large tariffs on Chinese products, including 30% on solar panels and electric vehicles, followed by 25% tariffs on steel and 10% on aluminum from most countries, sparking a trade war with China and angering several countries, including India and Canada.

In 2019, he proposed tariffs on all imports from Mexico “until such time as” illegal immigration to the U.S. ended. Those tariffs were averted days before they were set to take effect.

Collectively, Trump levied almost $80 billion worth of new taxes on Americans through tariffs on thousands of products valued at $380 billion in 2018 and 2019, according to the Tax Foundation. The trade war policies directly increased tax collections by an average of $200 to $300 per household, the nonprofit said in June.

They were also bad for business.

Trump’s tariffs were associated with lower future profits, sales, and employment for the firms whose equity prices were hit the hardest, according to a recent analysis from the Federal Reserve Bank of New York. Firms exposed to trade with China — roughly half of all publicly listed companies — saw profits that were about 13% lower than others.

Although many companies have reduced their exposure to China, almost all rely to some degree on global trade. For some, Trump’s tariffs could wipe out any profits they make on certain goods.

Tariffs on wine would devastate restaurants, which have “ridiculously low margins,” DeWayne Schaaf, chef and owner of Celebrations, a fine dining restaurant in Cape Girardeau, Missouri, told Quartz last month. Proposed tariffs on light vehicles would cost European and U.S. automakers up to 17% of their combined annual earnings, according to S&P Global (SPGI+0.45%).

‘Contingency measures’

That leaves corporations looking for a way out.

According to a new report from Goldman Sachs (GS+1.20%) analyzing public companies’ remarks on tariffs during earnings calls, corporations are eyeing three main strategies to deal with tariffs.

Some are planning to pass at least some of the buck along to consumers while absorbing enough of the extra cost that customers don’t ditch the product altogether. Products like toasters, jeans, and refrigerators would suddenly become more expensive. That could cost consumers between $46 billion and $78 billion in annual spending power, according to The National Retail Federation.

Another strategy several companies have entertained is stockpiling imported goods ahead of the tariffs, thereby avoiding some of the impact to their supply chains. That’s an idea that Navarro has been discussing with clients over the last several months.

“We’re advising our clients on taking contingency measures,” Navarro said. “ If there are materials or goods they import” that are at risk of being affected by tariffs, “they should ship as much of that material to the U.S. as possible before the tariffs are implemented,” she added.

Several companies have also indicated they would shift their supply chains to avoid tariffed countries. However, Goldman noted that some acknowledged they would likely not reshore production back to the U.S.

Not backing down

After Trump first broadcast his proposed tariffs on Chinese, Canadian, and Mexican imports on social media, the leaders of those nations hit back.

Mexican President Claudia Sheinbaum responded by signaling she would respond with her own tariffs before declaring that there would be “no potential trade war” between the two countries after a meeting with Trump. Chinese officials criticized the tariff threat, saying they wouldn’t “solve America’s own problems.”

Canadian Prime Minister Justin Trudeau flew to Trump’s Mar-a-Lago resort and had what Trump called a “very productive meeting,” where they discussed issues ranging from energy and trade to fentanyl. Earlier that day, Trudeau had warned that Trump wasn’t kidding around.

“I’m a big believer in tariffs. I think tariffs are the most beautiful word. I think they’re beautiful. It’s going to make us rich,” Trump said during an interview with NBC’s (CMCSA+2.53%) Meet the Press this week. “Tariffs are a — properly used, are a very powerful tool, not only economically, but also for getting other things outside of economics.”

And he’s right, according to Warren Maruyama, former general counsel for the U.S. Trade Representative under George H.W. Bush. While the scope of Trump’s threats is “uncommon, if not unprecedented,” tariffs can broadly be useful, he said. They can help secure political support from some groups, like the steel lobby, protect vulnerable industries or secure concessions.

The clearest way for Trump to enact tariffs would be to declare a national emergency, allowing him to invoke the International Emergency Economic Powers Act and impose tariffs, Maruyama said.

The decades-old legislation gives the president broad power over economic transactions. Trump even cited it in 2019 when he threatened to slap Mexico with tariffs, although he stopped short of actually following through.

“The gazillion-dollar question is whether this is just a negotiating strategy,” he added. “If he really is serious about the tariffs, [the affected countries] are probably going to hit back.”