President-elect Donald Trump announced plans to impose significant tariffs on goods from Mexico, Canada and China immediately after taking office on January 20. Citing concerns about illegal immigration and the fentanyl crisis, Trump promised a 25% tariff on all imports from Mexico and Canada and an additional 10% tariff on Chinese products, escalating tensions with some of the biggest America’s trading partners.
In a series of posts on Truth Social, Trump said, “On January 20, as one of my first Executive Orders, I will sign all paperwork necessary to impose a 25% tariff on Mexico and Canada on ALL products entering the United States, and its ridiculous Open Borders. This tariff will remain in place until drugs, especially Fentanyl, and all illegal aliens stop this invasion of our country!”
Trump added that the 10% tariff on China was a response to the country’s failure to stem the flow of fentanyl precursor chemicals, which he said fuel drug production in Mexico.
While Trump’s rhetoric has been characterized as a negotiating tactic, the potential economic fallout has alarmed businesses and governments alike.
What are tariffs and how do they work?
Tariffs are basically taxes imposed by a government on imported goods. These charges are generally calculated as a percentage of the value of the imported goods and are paid by the importing party, such as companies or distributors, who usually pass the increases on to consumers.
The main purpose of tariffs is to make imported goods more expensive, instead encouraging consumers and businesses to purchase domestically produced products. Governments can use tariffs to protect domestic industries from foreign competition, generate revenue, or achieve specific policy goals, such as penalizing a trading partner for perceived unfair practices.
However, tariffs often provoke retaliatory measures from affected trading partners, who impose their own tariffs on exports from the initiating country. This cycle can escalate into a trade war.
Game
The Chinese embassy in Washington responded quickly to Trump’s comments, warning that a trade war would hurt both nations. Spokesman Liu Pengyu said: “The economic and trade cooperation between China and the United States is mutually beneficial in nature. No one is going to win a trade war or a tariff war.” Liu added that China has taken concrete measures to combat drug trafficking, highlighting recent bilateral agreements.
Canada and Mexico refrained from directly addressing the tariffs but highlighted ongoing collaboration with the United States on border security and drug enforcement.
Together, Canada and Mexico account for about 34% of U.S. exports and 30% of imports.
China accounts for approximately 15% of imports and 7.5% of exports.
Economic consequences
Trump’s announcement has already shaken financial markets, with the Australian dollar hitting a seven-month low (currently 64.89 US cents at the time of writing) and the ASX 200 closing lower by 0.69%.
Economists have warned that the proposed tariffs could raise prices for American consumers and disrupt supply chains. A report from the Peterson Institute for International Economics estimates that the tariffs could cost U.S. families an average of $2,600 a year.
The US-Mexico-Canada Agreement
The proposed tariffs cast uncertainty on the future of the US-Mexico-Canada Agreement (USMCA), a trade pact negotiated by Trump himself during his first term.
Commentators noted that unilateral tariff increases would likely violate the agreement, as tariffs on products originating from parties to the agreement can only be increased in exceptional or justified circumstances.
However, enforcement mechanisms are somewhat ineffective. The agreement does not impose direct sanctions and cannot enforce compliance, although it does provide for tariff-based retaliation or suspension of benefits as enforcement tools. In the long term, the United States would lose credibility in terms of joining future trade pacts.
Arturo Sarukhan, Mexico’s former ambassador to the United States, suggested that the tariffs could lead to a renegotiation of the deal.
What happened last time?
During the first Trump administration, tariffs were a key element of the “America First” economic policy. In January 2018, the administration imposed tariffs of 30-50% on solar panels and washing machines, targeting imports from various countries, including China, South Korea and others. Additional tariffs of 25% on steel and 10% on aluminum were introduced in March 2018, initially applied to most countries, including China, Russia and Japan. In June 2018, these tariffs on steel and aluminum were extended to Canada, Mexico and the European Union, after previous temporary exemptions for these trading partners expired.
The administration targeted China in particular, with tariffs increasing in both scope and intensity, ultimately sparking a trade war. At the end of 2019, the tariffs covered nearly $360 billion in Chinese imports, including consumer products such as electronics, clothing and household goods.
These measures were justified as a means to reduce trade deficits, protect domestic industries, and address intellectual property concerns. However, trading partners, including Canada, China and the EU, have implemented retaliatory tariffs on US goods, targeting politically sensitive sectors such as agriculture and manufacturing, often in key Republican districts.
The effects of tariffs have been widely criticized by economists for their negative economic impact. Studies found that US consumers faced higher prices, with intermediate goods rising by 10-30% and washing machines by 12%. The tariffs reduced aggregate real income by $1.4 billion per month and increased the tax burden on consumers by $3.2 billion per month. Job losses have been significant, with steel tariffs contributing to 75,000 fewer manufacturing jobs and overall declines in employment in the affected sectors. The retaliatory tariffs caused a 9.9% decline in U.S. exports of targeted goods, particularly agricultural products. The Congressional Budget Office estimated a 0.5% reduction in GDP and a $1,277 decrease in median real household income in 2020.
What tariffs are currently in place on China?
Measures implemented during the Trump administration were continued under President Biden. These tariffs, known as “Section 301 tariffs” because of the section of the Trade Act of 1974 under which they are imposed, have been subject to various adjustments and revisions. They currently apply to Chinese imports worth more than $300 billion, with rates ranging from 7.5% to 25% across different product categories.
In September of this year, the Biden administration finalized tariff increases on some Chinese goods, including a 100% tariff on electric vehicles, a 25% tariff on lithium-ion electric vehicle batteries, and a tariff 50% on photovoltaic solar cells.