As I write this essay, President Trump had announced 25% tariffs against goods imported from Mexico and Canada into the United States, and these tariffs are expected to be made effective tomorrow morning.
For the purposes of this essay on capitalism, we need not speculate whether these tariffs are imposed or delayed tomorrow morning. Neither do we need to explore all the implications of the U.S. unilaterally inflicting tariffs on our biggest business partners. We do, however, need to explore the painful consequences of breaking trust with business partners.
© sasirin pamai's Images via Canva.com
Trust is at the Heart of the Deal
Trust is fundamental to well-run capitalism because it underpins the smooth functioning of markets and economic relationships. I know you know this truth, but it’s worth repeating so that we’re all on the same page. Trust is also scalable.
When individuals, institutions, and governments trust one another, just a few of the positive effects include:
Reduced Transaction Costs: Trust minimizes the need for excessive monitoring and legal oversight. When parties believe that contracts will be honored and agreements will be kept, they spend less on enforcing contracts and managing risks.
Enhanced Economic Efficiency: With trust, market transactions are more fluid and less encumbered by bureaucracy. This creates an environment where resources can be allocated more efficiently, spurring innovation and growth.
Increased Investment and Cooperation: Trust encourages long-term relationships between consumers, businesses, financial institutions, and, yes, governments. This helps build individual and collective confidence, which leads to greater entrepreneurism and investments.
For those interested, these positive effects support personal liberties, free markets, and smaller government. You don’t need me to detail the downside of these effects when trust is broken.
Contractual stability – trust put to paper – is vital to well-run capitalism because it creates a predictable legal environment where agreements are reliably enforced. When businesses and investors are assured that contractual obligations will be honored, they can comfortably engage in long-term planning and make investments with a sense of reduced risk.
If you’re interested in a deeper dive about the role of trust in economic prosperity and other positive effects, check out Francis Fukuyama’s classic book Trust: The Social Virtues and the Creation of Prosperity (1995).
© Billion Photos via Canva.com
Dealing with Your Business Partners
Business partners enter agreements with the expectation that the terms will remain fixed because stability is fundamental to building trust and reducing uncertainty in economic transactions. More pointedly, when business partners make a deal and sign the agreement memorializing the terms of that deal, they expect each other won’t just unilaterally change those terms and blow up the deal.
This expectation is grounded in several key points:
Predictability and Reduced Risk: When the terms of a deal are set and honored, both parties can plan for the future with confidence. This predictability minimizes the risks associated with opportunistic behavior, where one party might otherwise try to exploit the other by changing the terms to its advantage.
Lower Transaction Costs: A stable agreement eliminates the need for continual renegotiation or legal intervention, thereby lowering the costs associated with monitoring, enforcement, and dispute resolution. The fundamental legal principle of pacta sunt servanda—meaning "agreements must be kept"—reinforces this expectation, ensuring that contracts serve as reliable frameworks for business relationships.
Enhanced Economic Efficiency: When contractual stability is maintained, resources are allocated more efficiently, and long-term investments are encouraged. This creates a more robust environment for innovation, economic growth, and overall market efficiency.
Canada – United States – Mexico as Business Partners
The United States-Mexico-Canada Agreement (USMCA) is the current trade deal that replaced the North American Free Trade Agreement (NAFTA), updating the framework for trade across North America. It was reached through negotiations and signed by the key leaders of the three business partners that happen to be nations:
United States: President Donald Trump led the U.S. push for a new agreement that he argued would better protect American workers and industries by modernizing trade rules.
Canada: Prime Minister Justin Trudeau represented Canadian interests, ensuring that the agreement safeguarded labor, environmental, and other regulatory standards important to Canada.
Mexico: At the time of the signing, President Enrique Peña Nieto was in office and steered Mexico’s participation in the renegotiations to secure a deal that maintained the country’s economic ties while adapting to modern trade needs.
The joint efforts of these three partners not only marked a commitment to stronger economic ties but also set new standards in areas such as digital trade, intellectual property rights, and dispute resolution. Collaborative results like the USMCA highlight the importance of stable, predictable agreements among nations, which in turn boosts investor confidence and economic growth.
A current version of the USMCA is available here from the Office of the United States Trade Representative.
Blowing up the Deal
As nicely summarized by the international law firm Holland & Knight in a recent legal alert:
U.S. Customs and Border Protection (CBP) and the Department of Homeland Security (DHS) announced on March 3, 2025, the necessary actions to impose additional tariffs on imports of products from Mexico, in accordance with Executive Order 14194, "Imposing Duties to Address the Situation at Our Southern Border" and Executive Order 14198, "Progress on the Situation at Our Southern Border" and the “Amendment to Duties to Address the Situation at Our Southern Border," starting on March 4, 2025.
The main actions established by CBP and DHS are as follows:
The new additional import tariff will be an ad valorem rate of 25 percent, which will apply to all products originating from or produced in Mexico that are intended for consumption or withdrawn from a warehouse for consumption in the United States.
To control this, the Harmonized Tariff Schedule of the United States (HTSUS) has been modified to create a new tariff fraction 9903.01.01, which will include all "articles that are products of Mexico."
It is important to note that products from Mexico will also be subject to the general tariffs established in sections of chapters 1 through 97 of the HTSUS and will continue to be subject to anti-dumping duties, countervailing duties, or other duties, taxes, fees, and charges applicable to such products.
It is also important to consider that the new 25 percent ad valorem tariff applies without exception to Mexican products, including those that were originally sourced in accordance with the Mexico-U.S.-Canada Agreement (USMCA), exemptions or temporary tariff reductions, products subject to regulations established in the U.S. Federal Register and products for which Mexico was the last country of substantial transformation, among others.
The entirety of this Holland & Knight Legal Alert is available here. For our purposes, notice that it’s the unilateral actions of our United States that blows up the USMCA.
The reasons President Trump offers for unilaterally imposing these tariffs is to force Mexico and Canada to reduce the illicit flow of fentanyl and unauthorized immigrants into the United States. For our current purposes, we sidestep any debate and agree that these are noble ends for any country. But we can't sidestep the legitimate and pressing concerns of whether these means justify these ends, and whether these means are even rationally related to these ends.
Again, when business partners agree on the terms of the deal, the very foundation of their cooperation is built on trust, predictability, and mutual respect for the rules they’ve established. Even if a particular outcome might later seem highly justified and defensible to one of the partners, unilaterally breaking the terms destroys these foundations. Here’s why the means can’t justify the ends in such cases:
Erosion of Trust: The reliability of any agreement rests on the expectation that all parties will honor their commitments. When one side unilaterally changes the terms, it not only betrays that trust but also jeopardizes future collaborations.
Destabilization of the Framework: Agreements and contracts are designed to create a stable environment where risks are minimized. If one party disregards the agreed-upon terms, it sets a precedent that could lead to opportunistic behavior, ultimately destabilizing the business environment.
Long-term Consequences Over Short-term Gains: While breaking the agreement might yield immediate benefits for one party, it most likely damages long-term relationships and reputations. This damage most likely leads to higher transaction costs, legal disputes, and reduced willingness among other partners to engage in future deals.
Ethical and Legal Standards: Again, the principle of pacta sunt servanda is central to both business ethics and the legal system. Violating this principle means that even if the ends seem greatly desirable to the party breaching the agreement, the unethical means employed cannot be justified within a framework that values fairness and reliability.
What’s Napoleon Got To Do With It?
Mark Twain is credited with quipping, “History doesn’t repeat itself, but it often rhymes.” Whether Twain actually said that is immaterial, the truth of that observation is supported by history itself. To that point, shortly after taking office for his second term, President Trump in a social media post involved a famous phrase attributed to the French military leader Napoleon Bonaparte, “He who saves his country does not break any law.”
The sentiment behind this saying, whether uttered by Napoleon or just a reflection of his behaviors, is that during emergencies or existential threats, actions normally deemed illegal might be justified if they serve the higher purpose of safeguarding the nation. Napoleon appears to have led an exciting life, and even though he escaped the legal consequences of many of his actions, the facts regarding his eventual fate and legacy can’t be denied. Among those are:
Disruption of European Stability: Napoleon’s conquests had redrawn the map of Europe and led to years of warfare. His ambitions were seen as a direct threat to the political and social order of the continent.
Military Setbacks and Abdication: Following major defeats—most notably his failed invasion of Russia in 1812—Napoleon's military power waned. In 1814, he was forced to abdicate and was initially exiled to the island of Elba.
The Hundred Days and Final Defeat: Napoleon escaped from Elba and briefly regained power during a period known as the Hundred Days. However, after his decisive defeat at the Battle of Waterloo in 1815, the allied powers agreed that he posed too great a risk to European stability.
Preventing Future Threats: To permanently neutralize the threat he represented, Napoleon was exiled to the remote island of Saint Helena in the South Atlantic, far from Europe and any potential supporters.
Given Napoleon’s example, ultimate failures and exile, we question the wisdom of following his lead on, “He who saves his country does not break any law,” when his own history teaches justice metes punishment when the law fails.
Trust is always at the Heart of the Deal
Whether its Girl Scouts selling you cookies, your uncle selling you his car, your builder remodeling your home, your business team negotiating a new master service agreement, or your nation’s President approving multi-national trade agreement, trust is always at the heart of the deal. Trust is fundamental to well-run capitalism because it underpins the smooth functioning of markets and economic relationships. I know you know this truth, but it’s worth repeating until we’re all on the same page that we call Better Capitalism.
Not sure? Let's schedule a call and talk.
⭐⭐⭐⭐⭐ Our Amazon number 1 new release: Unleash more with Better Capitalism: Jesus, Adam Smith, Ayn Rand, & MLK Jr. on Moving from Plantation to Partnership Economics.
"This book merits close, sustained attention as a compelling move beyond both careless thinking and easy ideology."—Walter Brueggemann, Columbia Theological Seminary
"Better Capitalism is a sincere search for a better world."—Cato Institute
