President Donald Trump stopped short of imposing a 25% tariff on imports from two of the U.S.’s largest trading partners, Canada and Mexico, but proceeded with 10% tariffs on Chinese imports earlier this week.
Trump had long-promised tariffs against Mexico and Canada ahead of his inauguration, but stopped short of issuing them during the first week of his second term. He did, however, issue an executive order to assess compliance with the United States-Mexico-Canada Agreement, which he signed in 2018 and went into force in 2020 to replace the North American Free Trade Agreement. Another order directed federal agencies to examine flows of immigrants and drugs from Canada and Mexico into the U.S.
That order appears to be the Trump administration’s reasoning behind a 25% tariff on goods imported from the U.S.’s two neighbors that nearly went into effect on February 1st. The tariff threats follow in the footsteps of a similar one against Colombia over the treatment of deportees.
Jesse Schreger, an associate professor in Columbia Business School’s economics division, notes that even the quickly resolved trade spat with Colombia is likely to have, “important ramifications for the U.S. going forward.”
“Having seen the willingness of the Administration to cut a country off from the U.S.-led trade and financial system, other countries around the world will have to think about how they can best insulate themselves from economic pressure before it comes,” Schreger says.
He added that Chrystia Freeland, Canada’s former finance minister and a current member of Canada’s Parliament, called for a summit of nations affected by U.S. pressure following the threats against Colombia. This helps to paint a picture of what is to come if Trump attempts to propose further tariffs.
“If countries around the world, and in particular American allies, work to insulate themselves from the U.S., threats like those against Colombia will be less effective in the future, and countries’ concerns about them will serve to fragment the world trade and financial system,” Schreger says.
In terms of their impact on inflation, tariffs will likely have a “one-time effect,” since they directly raise the prices on imported goods. "Whether the tariffs will drive inflation dynamics is going to depend on their breadth and duration. Both are uncertain at this time," says Schreger.
In past statements, Trump has also promised that the tariffs inflicted on Mexico and Canada, coupled with broad deregulation, would do much to reduce the U.S.’s trade deficit, encourage domestic manufacturing, and create jobs. However, this is unlikely to be the case, according to Brett House, professor of professional practice in CBS’s economics division, unless U.S. consumption is reduced and saving is increased.
“The President's justifications for these tariffs are detached from fact and reality,” House says, noting that Trump overstates the size of U.S. trade deficits with other countries.
He added that while Trump claims that the 25% tariff is intended to force Canada and Mexico to stem the flow of drugs and illegal immigrants across the US border, “the movement of both drugs and undocumented people across the northern border is vanishingly small.”
“The 25% tariffs on Canada and Mexico would mean that the U.S. will be charging much higher taxes on imports from close allies with whom it has a free-trade agreement than it charges on imports from rogue states such as Venezuela’s undemocratic regime, whose repression drives many of the undocumented immigrant flows that President Trump says he wants to stem,” House says.
While Trump has claimed that it would be foreign economies that would bear the burden of tariffs, it will be U.S. households and businesses that will be most impacted by higher prices, according to House.
This is because as the costs of imported goods and services increase, production becomes less efficient, increasing prices for both consumers and businesses. House highlighted the fact that around half of U.S. oil imports come from Canada, and that these imports account for about a quarter of all U.S. oil consumption. Therefore, the new 10% tariffs on these energy inflows from Canada will increase costs in the U.S. All in all, these tariffs will likely increase inflation and could even cause it to accelerate, House noted, since energy prices touch nearly every part of the economy.
The tariffs threatened against Mexico and Canada nearly triggered dollar-for-dollar counter tariffs from both countries on U.S. goods, which would have weakened U.S. industry, according to House. More broadly, damaging the U.S.’s economic relationship with its trading partners could open the door for other world superpowers to take advantage.
“China has already begun intensifying its trade overtures to Canada and several Latin American countries. The world doesn't stand still while the White House sows uncertainty and belligerence into American commercial relationships with the rest of the world,” House says.