The Tariffs are here. Or they seem to be. President Trump signed executive orders over the weekend imposing import taxes on goods from Canada, Mexico and China, as he has threatened since late November. If implemented, these are only likely the first of many waves of tariffs, but Trump is definitely starting off with a bang, imposing tariffs, in the first 2 weeks of his presidency covering about 45% of US imports, much more than the volume affected in his first term. Ostensibly imposed due to border concerns including fentanyl trade, the President’s own public justification of the tariffs also includes complaints about trade imbalances and trade disputes suggesting that concessions at the border would not necessarily prompt a quick removal. However, it still remains to be seen if market pressure will shift the stance, especially when coupled with both planned retaliation and border moves.
What Happened and when will it come into effect? The new tariffs include a 25% tax on most Canadian and Mexican goods, with only 10% on most energy trade from Canada, and 10% on all Chinese goods. Those for Canada will kick in on February 4 at just after midnight – unless there are agreements to change it. At time of writing Trump was set to talk with some of the countries on Monday, but there is no guarantee that any changes would be to lower the tariffs. Notably, in addition to these tariffs, the Trump administration plans other tariffs.
To put these into context, import taxes may now apply to around 45% of US imports, much more than those imposed in the Trump administration when only a sizeable portion of Chinese trade was subject to tariffs. While currencies will likely adjust to cover some of the additional cost, American consumers will likely end up paying meaningfully more for the same items, which include many food products, especially from Mexico and the tariff process will likely significantly boost costs for US made cars.
Perhaps unsurprisingly, global equity markets were not happy by the news. While big moves can happen in lighter trading Asian hours, the scale of the tariffs and lack of planning time, will hurt global automakers, especially those that operate throughout North America (including some large Japanese companies). The biggest moves are likely to be in currency markets as dollar resumes its rise, rates in US remain high and alternative stores of value struggle. CAD and MXN will likely weaken as part of the adjustment. Will Trump hold to his pledge not to be swayed by the market? Will advisers like Bessent try to actually moderate the policy.
Any exemptions? Only lower rates for fuel at this point
The new rules abandon the de minimis levels that allowed parcels of up to $800 to enter the US duty free from these countries. This could help reduce drug shipments but also will increase costs of e-commerce imports including from China. It also means that more customs agents will likely be needed or face more restrictions/delays.
There are no clear ways of granting exemptions to these tariffs. Energy sector lobbying resulted in a lower tariff for energy (oil, gas, definitely, but also potentially uranium and some forms of electricity. Canadian energy will “only” be subject to a 10% tariff (around $6 according to Rory Johnston, which is likely to be divided between US refiners, US buyers and Canadian sellers). Not as bad as it could have been but additional regulation. Re-export of fuel through the US to get to other countries might not be subject to the tariffs, but this is TBD.
The goals seem to be broadening. So much for leverage?: Trump used IEEPA powers to implement the tariffs, which is justified to the border emergency. However, Trump’s Truth social justification and those from the WH press office also point to other issues including trade deficits and trade disputes, suggesting that progress on the border may not be enough (or if it is these tariffs could return.)
Trump still needs to articulate a trade strategy and tariff roadmap, something CNAS’ Emily Kilcrease argued for a few weeks back. His Day 1 EO on trade set in motion a set of trade reviews due by March and April 1, but Trump’s team may struggle to defer new tariffs until then. Note that in his press conference, Trump suggested that tariffs on steel, aluminum and other metals are coming. The EU too was singled out as a target, perhaps partly due to expiring agreements. Beyond this, watch the budget talks as Congress starts up and revenue goals are added to the picture,
Will they stand? Legal challenges are definitely possible (see Peter Harrell for a good perspective on this). IEEPA rules theoretically give a lot of powers to the president to use coercive economic tools to address known national security threats but have rarely been used to justify tariffs, potentially leaving them vulnerable to legal and congressional challenges. Arguably this is a substantial over-reach of executive power, which raises concerns in Congress. Enough Republicans who hold the narrow majority may well like the revenue outlook even if the combo of stronger USD and more expensive intermediate goods will challenge both US manufacturing or at least manufacturing exports.
Retaliation could deepen the global economic pain but add to negotiations: All three countries have pledged retaliation, despite threats from Trump that this might increase the tariffs they face. At time of writing only Canada had announced specific targets, perhaps in part due to the fact that Canada was signaled out for earlier implementation (4/February). Mexico plans to announce its plan on Feb 3. Canada will impose tariffs on C$30 billion of goods beginning along with US tariffs, including Teslas, orange juice, plastics and alcohol (see my piece on alcohol and tariffs). Non-tariff barriers are also going up including restrictions on procurement. Trudeau also started a public comment period on imposing more tariffs on a larger set of products to go into effect at the end of February. Notably, these will undoubtedly damage Canada too, but could generate revenue to be redistributed to losers from US tariffs.
China has yet to clearly articulate a response. It is the lunar new year after all! Officials has signaled there would be one including potential reduction in cooperation on fentanyl (which seems to be counter to Trump goals). Even if such agreement has yet to be sufficient, smuggled drug volumes and overdoses do seem to be down and more work needs to be done. Possible Chinese steps could include further reductions in agricultural purchases (Brazil already took much of US soybean market share in the last few years), as well as continuing to deploy its own chokepoints in critical minerals and battery technology. All eyes too remain on the CNY fixing. Currencies are likely to be a major tool of adjustment for both Canada and Mexico (perhaps most so for Canada given relatively more anchored inflation and bigger macro shock). The RMB too is likely to weaken. The stronger USD is unlikely to help the US export part of the goals.
Creating new trade routes?: the highly integrated North American markets make easy alternatives more difficult and immediate alternative supplies are limited. However, over time, some domestic policies such as cutting inter-provincial trade barriers (Canada) and improving infrastructure for transporting fuel and other goods across the country or for export to other markets could be a source of resilience. Building new pipelines is not easy, especially given pre-existing permitting issues. Perhaps some of the new political commitment in Canada will include investments in more pipelines to take fuel east to Canadian buyers and Europe, and West for more Asian export, but these are not short-term solutions.
China is perhaps best placed to either pass on the additional costs to US consumers/wholesalers or find other markets given its existing overcapacity. Moreover, a China+1 strategy (investing not only in China but also in other intermediate markets including in South East Asia) may provide more resilience. After all some of this diversification was the result of Trump and Biden tariffs. These measures are unlikely to be the end of China tariffs though. It also seems as though the Trump administration will look to double down on tech export controls after the DeepSeek shock. But it’s an open question how effective this will be. Notably Trump administration will also need to finalize the new AI diffusion rules,
Many people are asking whether Canada and Mexico or Europe for that matter could just turn to China as the US puts up barriers. Aside from some volumes of natural resources, this has its limits as an export partner. China’s trade surplus is growing and it is looking for new markets rather than opening to new suppliers. Trade diversion is a risk. For some countries, cheaper EVs and renewable energy tech would be a plus especially with less investments, but only a few countries can benefit from investment. Overall, the US has remained a major consumer of last resort. Its hard to see China being able to take on that mantle, especially with its continued property drag.
Overall this weekend’s moves if upheld, suggest that any efforts to continue G7/10/OECD bandwagoning against China will be more difficult, as will any friendshoring aimed at reducing Chinese dominance of energy channels. Rather than fortress North America to keep Chinese EVs out and common higher tariffs and rules of origin, Trump is indeed trying to use the leverage he has to meet both foreign policy and economic goals. The former may be easier, at least in the hemisphere, but doing so will likely mean he has to settle for higher fuel prices and broader prices at home.
Ziemba Insights 