The world has been playing catch up with US President Donald Trump’s tariff threats as global leaders have tried to discern fact from fiction. For now, that waiting game seems to be over. Long-feared tariffs on two of the US’s closest allies came into effect yesterday (4 March).
Canadian and Mexican imports will now face 25% tariffs in the US, following a one-month delay that had seeded expectations for a last-minute deal to come through. The US has also doubled the 10% tariff on Chinese goods that went into effect on 4 February. The actions set off retaliation tariffs from China and Canada.
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Given the by-now characteristic unpredictability of this administration, whether these tariffs remain for a few days, months or years is anyone’s guess. What we do know is that their imposition breaks a nearly century-long tradition of open trade with allied countries.
“Though Trump 1.0 introduced tariffs on China and some partners, you would have to go back to the Smoot-Haley tariffs of the 1930s for something comparable,” explains, Michael Gasiorek, Chatham House associate fellow and UK Trade Policy Observatory director at the University of Sussex, to Investment Monitor.
After the tariffs came into effect, US Secretary of Commerce Howard Lutnick said that Trump will “probably” announce a reduction in the rates imposed on Mexico and Canada.
“Both the Canadians and Mexicans were on the phone with me all day today trying to show that they’ll do better,” he commented on Fox Business Network.
However, Canada’s Minister of Foreign Affairs Mélanie Joly told the BBC that her office had not been contacted about a deal. She highlighted that, while administration officials can “say many things,” in reality, “the only one that really takes a decision is President Trump.”
In his congressional speech, the President said that the tariffs will bring “a little disturbance, but we’re OK with that. It won’t be much.”
Tariffs and announced retaliation
The US imposed 25% tariffs on imports from Canada and Mexico, with a 10% tariff on Canadian energy imports. The lesser tariff on energy products would soften the blow on oil prices. Nearly a quarter of US daily oil consumption comes from Canada. The Canadian province of Alberta exports 4.3 million oil barrels a day to the US. According to the US Energy Information Administration, the country consumes around 20 million barrels a day.
The tariffs set off an automatic retaliation plan from Canada. It consists of 25% tariffs on C$155bn ($107bn) of American goods that will take effect over the course of three weeks. This will affect C$30bn ($20.7bn) worth of goods effective immediately, and the remaining C$125bn ($86bn) in 21 days. Talks are still ongoing as to what specific products will be affected, but reports indicate that these may include orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics and pulp and paper.
The statement added that “should the US tariffs not cease, we are in active and ongoing discussions with provinces and territories to pursue several non-tariff measures.” This could look like stronger regulations, quotas, rules of origins and others.
Trump also doubled the 10% tariff on Chinese imports that went into effect in early February. This prompted a quick retaliation from China. It announced it would impose additional 10-15% tariffs on major American agricultural products such as chicken, pork, soy and beef and increased export restrictions on major US companies. These tariffs are set to take effect March 10.
While Mexico hasn’t outlined its specific plan yet, President Claudia Sheinbaum said the country would respond with tariff and non-tariff measures if the US tariffs weren’t revoked. She added that she would share details of retaliatory plans on Sunday in the main square of the country’s capital.
China and Mexico may have postponed their retaliatory measures in hopes of negotiating a deal to reduce or eliminate the new tariffs.
North American effects
Analysts overwhelmingly agree that the tariffs on Canada and Mexico will produce inflationary pressures in North America.
“The economic shock is first of all to do with the rise in the cost of imported goods,” outlines Gasiorek. “This affects consumers through higher prices and producers buying more expensive intermediate inputs, which in turn impacts on their competitiveness. The second issue is the uncertainty all this generates which leads to reduced exports by firms and reduced investment.”
According to the Peterson Institute for International Economics, these tariffs (along with the China ones) could cost the average US household over $1,200 a year.
These actions are also in violation of the United States-Mexico-Canada Agreement (USMCA), the updated NAFTA agreement that has been securing free trade in North America for decades. However, Trump may be able to circumvent this through activating special economic powers.
“Under US law, and under the International Emergency Economic Powers Act, there may be legal grounds for the actions the administration is taking,” says Gasiorek. “Legal scholars seem to have a mixed opinion on whether or not there is a sound legal basis for these tariffs, and we can expect this to be litigated in the US courts.”
Mexico and Canada also seem to be betting on different strategies. While Canada’s retaliation was automatic, Mexican President Claudia Sheibaum is holding off for now.
Eirini Tsekeridou, fixed income analyst at Julius Baer Group, tells Investment Monitor: “Sheinbaum’s strategy seems to be less confrontational and more cautious in comparison to, for example, Canada, which imposed counter-tariffs on the US yesterday. A call between President Sheinbaum and President Trump on Thursday may shed more light on the tariff developments.”
China, from 2018 to now
With regard to China, there are some factors that make this set of tariffs different. During his first mandate, Trump imposed 25% tariffs on $50bn of Chinese exports as well as steel and aluminium tariffs for most countries.
Alicia Garcia Herrero, chief of Asia-Pacific economist at Natixis, explains to Investment Monitor that, this time: “The shock [to China] is relevant, but it’s not bigger than it was then (2018). Why? Because China is less exposed to the US. So we would need the US to close all the other channels, especially Vietnam because Vietnam has a trade surplus with the US, which is half that of China.” Many firms have relocated from China to Vietnam, as more tariff barriers have led to trade rerouting.
“China has much more economic autonomy,” she adds. “It doesn’t depend on the US for many products and if it does, for advanced semiconductors for example the US has export control.”
Gasiorek echoes some of this sentiment.
“The share of China’s exports going to the US is around 15%, so that is pretty significant,” he notes. “In contrast, the share of Chinese exports going to the US in 2017 was close to 20% so they have already diversified away from the US to some extent. But still, the US market “remains pretty important to China.”
In terms of China’s response, Julius Baer Group economist Sophie Altermatt highlights that it is more targeted than during Trump’s first term. She points out that their retaliatory actions are mostly aimed at agricultural products which were “part of the Phase One trade agreement in 2020, in which China agreed to increase its purchases of certain US goods over a two-year period.”
“For soybeans in particular, China is a major export market for the US, with about half of all US soybean exports going to China […] While China’s response leaves room for negotiation, the US administration has not yet indicated any plans for trade talks, and it remains uncertain whether this would change in the near future […] Until April 1, the US is reviewing the Phase One trade agreement with China, which was signed in 2020, posing further potential for increased tension.”
However, it is worth noting that even in the scenario where all tariffs get reduced or eliminated, the heightened risk is enough to make companies restructure their supply chains.
“We’re seeing corporates relocate their production from China to countries such as Vietnam, India and Indonesia to hedge risk and mitigate the impact of potential tariffs,” Oliver Chapman, CEO of global supply chain procurement firm OCI, points out. “The automotive industry, including firms like General Motors and Ford, have experienced notable stock declines due to tariff concerns.”
So, whether or not the tariffs plan changes, the perception that they are purely a negotiating tactic seems to be vanishing away.
“Once [tariffs are] introduced politically it may be harder for the policy to be reversed,” Gasiorek says. “Though having said that, with Trump it is always very hard to predict – but that seems to be part of his playbook.”
