Quick Bite: Trump Taps Tariffs on Canada, Mexico & China
Author: Paul Zwi
President Trump has officially imposed 25% tariffs on imports from Canada and Mexico and a 10% levy on Chinese products, triggering retaliatory measures. Canada announced 25% counter-tariffs on $106 billion worth of US goods, while Mexico pledged similar action. China vowed to initiate World Trade Organisation (WTO) proceedings but has not yet announced counter-tariffs.
Source: New York Times
Economists predict the tariffs will raise US inflation and cut GDP growth by up to -1.2%, with potentially severe effects on global supply chains. Trump invoked emergency economic powers to justify the move, citing national security concerns over immigration and drug trafficking. The tariffs could lead to prolonged trade tensions, with potential impacts on industries like automotive, energy, and consumer goods.
The USA has major deficits with Canada, Mexico, and China (and most countries, one exception being Australia). Nearly 80% of both Canada’s and Mexico’s exports go to the US. On the other hand, ~17% of US exports go to Canada and ~16% go to Mexico. Canada and Mexico cannot sustain this financially — both are extremely dependent on the US to keep their economies functioning, so they will have no choice but to negotiate and ultimately accept terms that favour the US. This is the brutal economic reality, but it will not be without costs to the US economy.
Source: Pantheon Economics
Pantheon Economics estimates that the tariffs if remaining at the current level, could lead to a 0.6% uplift in US consumer prices.
Trump is also considering imposing tariffs on the European Union (EU). Over the past 12 months through to November 2024, the US imported the most merchandise from the EU, Mexico, China, Canada, and Japan in that order (chart below).
Source: Yardeni Research
Source: New York Times
At a macro scale, the real impact of these tariffs for the US will likely be overstated in the stock market, with volatility accompanying every twist and turn. But we just don’t know how it plays out. GDP could certainly be impacted, and inflation could, but Trump knew all of that when he made these moves. Possibly, he views it as short-term sacrifices for massive, long-term positioning power. Welcome to the new Trump World!
During Trump’s first presidency, he would often counter moves that negatively impacted the stock market with moves that would be viewed as bullish. Right now, tariffs (which were promised) are unsettling markets.
Source: Yahoo Finance
Financial markets do not like uncertainty, and we are guaranteed to see a lot of changes in 2025. However, that doesn’t necessarily mean that the result will be bad for the US or markets, but we do anticipate heightened volatility.
Where to from here?
Mexico is probably in a weaker position than Canada. The illegal migration issues at the southern border have impacted the US severely over the years, as have the drugs coming into the country, so it will be popular for Trump to deal harshly with Mexico. Mexico’s government has long been riddled with corruption and inefficiency, so perhaps this is a necessary wake-up call.
Canada, on the other hand, seems more like a power grab and Trump flexing his muscles against a woke Trudeau administration. Perhaps we’ll find out if there is more to it than that.
For both Mexico and Canada, tariffs are a very big deal. Since exports to the US account for around 20% of their respective GDPs, tariffs of 25% could plunge both the Canadian and Mexican economies into recession later this year.
We’ll conclude with some words from an editorial in the Financial Times:
“The unravelling of North American free trade and supply chains built up over decades will deal a severe blow to both US consumers and corporate America — especially oil refining, automobile production, pharmaceuticals and agriculture. Trump’s actions on China are less dramatic but look like a modest downpayment on more extensive plans to come. Together, the three countries account for almost half of US imports. The estimated $100bn in additional tariff duties will surely be dwarfed by the economic cost.”
“The harm to American diplomatic power is no less profound. From the 1980s, both Canada and Mexico set aside decades of scepticism to make a strategic bet on free trade with the US, culminating in the Nafta deal of 1994. The economic benefits, especially to Canada, have been plentiful. Both were coerced by Trump in his first term to renegotiate that deal. That the president is now riding roughshod even over the revised deal, the USMCA, sends a message America’s word cannot be trusted. Canada and Mexico should not leave Trump’s moves unanswered, but their response needs to be creative, co-ordinated and selective.”
– Financial Times (3 February 2025)
