President Trump on Tuesday effectively launched a trade war with the United States’ three largest trading partners.
As of 12:01 a.m., all goods imported from Canada and Mexico are subject to a new 25% tariff, except for energy from Canada, which is subject to a 10% tariff. Goods from China now face a 20% tariff, the sum of the 10% tariff Trump imposed last month and a new 10% tariff taking effect today.
Trump initially threatened to impose the tariffs on Canadian and Mexican goods last month, but gave the countries a 30-day reprieve to give them time to reach new trade and security agreements with the U.S. On Monday, however, Trump said there was “no room left for Mexico or for Canada” to negotiate an alternative, and the tariffs took effect a few hours later.
Trading partners respond: China and Canada quickly announced retaliatory tariffs. Starting next week, China will impose 15% tariffs on a range of agricultural products, including chicken, wheat, corn and cotton; other imports, including sorghum, soy beans, pork, beef, dairy, fruits, vegetables and aquatic products, will face a 10% tariff.
Mexican President Claudia Sheinbaum said she would respond to the tariffs this weekend. “There is no reason, rationale or justification to support this decision that will affect our people and nations,” Sheinbaum said in Mexico City. “Nobody wins with this decision.”
Prime Minister Justin Trudeau of Canada denounced the tariffs and the legal basis for imposing them, saying the idea that his country isn’t cooperating with the U.S. on restricting the drug trade is “totally false.” Trudeau said the U.S.-Canadian border is “already safe and secure,” while warning that as a result of Trump’s tariffs, “Americans will pay more for groceries, gas, and cars, and potentially lose thousands of jobs.”
Trudeau invoked a recent editorial in The Wall Street Journal that referred to Trump’s tariffs as “the dumbest trade war in history” (a characterization that Trump took issue with on social media last week). “It’s not in my habit to agree with The Wall Street Journal,” Trudeau said. “Donald, they point out that even though you’re a very smart guy, this is a very dumb thing to do.” (The Journal doubled down on its assessment this week. “We’ve courted Mr. Trump’s ire by calling the Mexico and Canada levies the ‘dumbest’ in history, and we may have understated the point,” the Journal’s editorial board said Monday. “Mr. Trump is whacking friends, not adversaries.”)
Trudeau also noted the strange contrast between how Trump was treating friends as opposed to adversaries. “Today, the United States launched a trade war against Canada,” he said. “At the same time, they’re talking about working positively with Russia, appeasing Vladimir Putin — a lying, murderous dictator. Make that make sense.”
Ontario Premier Doug Ford told The Wall Street Journal that he would impose a 25% export tax on energy produced in Canada and sent to Minnesota, New York and Michigan. He also threatened to expand the export taxes to include minerals such as nickel. “President Trump underestimates the Canadian people,” Ford said. “He’s going to wake up real quickly about our critical minerals.”
In response to Canadian moves, Trump made more threats, saying: “Please explain to Governor Trudeau, of Canada, that when he puts on a Retaliatory Tariff on the U.S., our Reciprocal Tariff will immediately increase by a like amount!”
What does Trump want? It’s not entirely clear. Trump has framed the tariffs as a punitive measure targeting drug smuggling and illegal immigration, imposed amidst a national emergency. But he has also spoken about tariffs as a tool to aid the rebuilding of American industrial capacity, a means of increasing federal revenues, and a way to close the trade deficit, which he sees as the result of foreign trade partners “ripping off” the U.S.
Although Trump is tremendously enthusiastic about tariffs and their efficacy — once saying, “To me, the most beautiful word in the dictionary is ‘tariff’” — economists are far less so, largely seeing them as taxes paid by importers and consumers that typically raise costs and reduce economic activity. Investors sided with the economists on Monday and Tuesday, sending stocks sharply lower amid warnings of higher prices and lower trade volumes.
The White House stuck to its guns, though, with Commerce Secretary Howard Lutnick saying that while there “may well be short-term price movements” as a result of the tariffs, “in the long term, it’s going to be completely different.”
Echoing Trump’s rosy view of how the tariffs will work, Lutnick said in an interview on CNBC they would help produce “the greatest America.”
“We’ll have a balanced budget. Interest rates will come smashing down, and I mean 100 basis points, 150 basis points lower,” he said. “This president is going to deliver all of those things and drive manufacturing here.”
Potential costs: Several major U.S. companies have warned that price increases are on the horizon. Target CEO Brian Cornell said that “the consumer will likely see price increases over the next couple of days” on products imported from Mexico, such as fruits and vegetables. Leaders at Best Buy and Walmart also said price hikes will be unavoidable.
Automakers have said that the tariffs will cause prices to rise sharply, given the tightly integrated production system that now stretches across North America, with The Wall Street Journal noting that some cars cross borders as many as eight times as they are assembled. Last month, Ford CEO Jim Farley said that 25% tariffs on Mexico and Canada would “blow a hole” in the U.S. auto industry. “What we're seeing is a lot of cost, a lot of chaos,” he said.
Some economists are worried that a trade war, combined with reduced immigration, could mean a return to the bad old days of the 1970s, when prices and unemployment rose at the same time. “Directionally, it is stagflation,” said Mark Zandi, chief economist at Moody’s Analytics, per CNBC. “It’s higher inflation and weaker economic growth that is the result of policy — tariff policy and immigration policy.”
Zandi added that he doubted things would get as bad as they were in the ‘70s, due to likely interventions by the Federal Reserve. While some investors think a slowdown could push the Fed to cut interest rates, Zandi says they may take the opposite path if renewed inflation looks like a threat. “If it looks like true stagflation with slow growth, they will sacrifice the economy,” he said.
Even if the U.S. manages to avoid a painful slowdown, economists say the tariffs will impose real costs, nonetheless. Analysts at the Yale Budget Lab released a report Monday showing that if the tariffs remain in place at current levels, the overall price level will rise by 1.0% to 1.2%, reducing consumer buying power by $1,600 to $2,000 (in 2024 dollars) on average. Real economic growth will fall an estimated 0.6% this year, resulting in an economy that is persistently 0.3% to 0.4% smaller than it would be without the tariffs — worth about $80 to $110 billion annually.
Tariff revenues, on the other hand, can be expected to increase. The Yale analysts estimated that the tariffs would raise as much as $1.5 trillion in revenues over 10 years, though that number could be roughly $300 billion smaller on a dynamic basis, depending on how trading partners retaliate. However, contrary to Trump’s promise that foreigners will pay the tariffs, the revenues will be collected from American importers and, ultimately, consumers.
What’s next: Trump will no doubt discuss the tariffs in his speech to Congress Tuesday night, so we may learn more about how he plans to proceed. Although Trump is known for his defiance, the widespread negative reaction to the tariffs in the financial markets may influence his stance. Following another down day in the stock market Tuesday — the Dow Jones Industrial Average has fallen more than 1,300 points in two days — the White House signaled a potential change in tone late in the day, with Lutnick saying Trump will “probably” announce compromise deals with Canada and Mexico, perhaps as soon as Wednesday.