United States President Donald Trump has announced broad tariffs on major US trading partners Canada, Mexico and China, claiming a “major threat” from illegal immigration and drugs — a move that sparked promises of retaliation.
Canadian and Mexican exports to the United States will face a 25 per cent tariff starting on Tuesday, although energy resources from Canada will have a lower 10 per cent levy.
Goods from China, which already face various rates of duties, will face an additional 10 per cent tariff.
The announcement threatens upheaval across supply chains, from energy to automobiles to food.
Canadian and Mexican exports to the United States will face a 25 per cent tariff. Source: AAP, AP / Judi Bottoni
What are tariffs and how do they work?
A tariff is a tax imposed by a country on foreign goods imported into that country. It’s important to note that tariffs are not paid by the foreign countries they target.
They are charged to the buyer of those goods, not to the foreign seller, and the money goes to — in this case — the US Treasury.
However, most economists agree that it’s the residents of the country imposing the tariffs who pay the biggest cost — as importers will typically pass the extra cost onto the consumer by raising prices.
Why has the US imposed tariffs?
Trump had previously threatened all three countries with tariffs, arguing it would force them to crack down on immigrants and illegal drugs entering the US.
According to the White House, the aim of the tariffs is to hold all three countries “accountable to their promises of halting illegal immigration and stopping poisonous fentanyl and other drugs from flowing into our country”.
Trump invoked the International Emergency Economic Powers Act in imposing the tariffs, with the White House saying “the extraordinary threat posed by illegal aliens and drugs, including deadly fentanyl, constitutes a national emergency”.
“Tariffs are a powerful, proven source of leverage for protecting the national interest,” the White House said alongside the announcement.
Trump has long spoken of his support for tariffs for a wide range of reasons. In his view, tariffs can also help pressure US manufacturers to produce goods domestically, by making it harder for foreign countries to sell their products overseas.
How have affected countries responded?
China’s commerce ministry said in a statement it would take “corresponding countermeasures” and file a claim against Washington at the World Trade Organization.
China pushed back on the idea that it was to blame for fentanyl, a deadly synthetic opioid, entering the US.
“Fentanyl is America’s problem,” China’s foreign ministry said.
“The Chinese side has carried out extensive anti-narcotics co-operation with the United States and achieved remarkable results.”
Mexican President Claudia Sheinbaum announced that her country would impose retaliatory tariffs.
Sheinbaum said she had told her economy minister “to implement plan B that we have been working on, which includes tariff and non-tariff measures in defence of Mexico’s interests”.
Canadian Prime Minister Justin Trudeau — who spoke with Sheinbaum — separately said his country would hit back with 25 per cent levies of its own on select American goods worth CAD$155 billion ($171 billion) with a first round on Tuesday followed by a second one in three weeks.
“We’re certainly not looking to escalate. But we will stand up for Canada, for Canadians, for Canadian jobs,” he said as he warned of a fracture in longstanding Canada-US ties.
What impact could tariffs have in the US and elsewhere?
US Senate minority leader Chuck Schumer has warned new tariffs could “further drive up costs for American consumers”.
Canada and Mexico are major suppliers of US agricultural products.
The tariffs are also expected to hit the auto industry hard, since automakers and suppliers produce components throughout the region.
Analysts have warned that hiking import taxes on crude oil from countries like Canada and Mexico threaten US energy prices too.
Nearly 60 per cent of US crude oil imports are from Canada, according to a Congressional Research Service report.
Trump has repeatedly expressed his approval of tariffs as a policy measure and has signalled that the announcement could be the first volley in further trade conflicts to come.
This week, he also pledged to impose future duties on the European Union.
Trump has also promised tariffs on semiconductors, steel, aluminium, oil and gas.
“The tariff action announced today makes clear that our friends, neighbours and Free Trade Agreement partners are in the line of fire,” said Wendy Cutler, vice president at the Asia Society Policy Institute and a former US trade negotiator.
Avocado producers in western Mexico plan to open new export markets in Asia and South America to cope with an eventual drop in sales to the United States due to the tariffs. Source: AAP, EPA / Francisco Guasco
“The move today is an opening salvo on the tariff front,” she told Agence France-Presse.
Economic integration between the United States, Mexico and Canada — who share a trade pact — means stiff tariffs will have “a strong and immediate impact” in all three countries, she said.
Imposing sweeping tariffs on the three biggest US trading partners in goods carries risks for Trump, who won November’s election partly due to public dissatisfaction over the economy.
Higher import costs would likely “dampen consumer spending and business investment,” said EY chief economist Gregory Daco.
He expects inflation would rise by 0.7 per cent in the first quarter of this year with the tariffs in place, before gradually easing.
“Rising trade policy uncertainty will heighten financial market volatility and strain the private sector, despite the administration’s pro-business rhetoric,” he said.
Economists also expect growth to take a hit. Trump’s supporters have downplayed fears that tariffs would fuel inflation, with some suggesting his planned tax cuts and deregulation measures could boost growth instead.
Doug Ford, premier of Canada’s economic engine Ontario, warned of potential job losses and a slowdown in business with tariffs.
