Trump Implements New Tariffs on Key Trade Partners, Pauses on Mexico and Canada
In a significant move, President Trump has introduced a wave of new import duties targeting the United States’ primary trading allies: China, Mexico, and Canada. Shortly after the announcement, the imposed tariffs on Mexico and Canada were paused for a month, pending further developments.
Tariffs serve as levies on imported goods, acting as a fiscal barrier to regulate international trade and protect domestic industries from foreign competition. Essentially, these taxes are applied to products brought into the country, with U.S. businesses bearing the responsibility of paying these duties to the government directly, according to the Tax Foundation.
While economists generally view tariffs unfavorably, they remain a common tool for influencing trade dynamics. Proponents, including President Trump, argue that tariffs can shield American manufacturers by making imported goods more expensive, thereby encouraging consumers to choose domestically produced items. Furthermore, companies might respond by establishing new manufacturing facilities within the United States to circumvent these tariffs.
At last week’s World Economic Forum in Davos, Switzerland, President Trump emphasized this strategy, stating, “Come make your product in America,” adding, “But if you don’t make your product in America, which is your prerogative, then very simply you will have to pay a tariff.”
Despite these assertions, many economists and trade experts remain skeptical about the efficacy of tariffs. The Peterson Institute for International Economics points out that tariffs have historically been ineffective in revitalizing the manufacturing sector.
On Saturday, Trump signed an executive order imposing a 25% tariffs on imports from Canada and Mexico, alongside an additional 10% duty on Chinese goods. In response, Canada promptly enacted retaliatory tariffs, and Mexico announced plans to impose similar measures against U.S. products.
However, President Trump announced on Monday via his Truth Social app that he is pausing U.S. tariffs targeting imports from Mexico for a month. This suspension follows Mexico’s agreement to deploy 10,000 troops to the U.S.-Mexico border to address the influx of fentanyl and migrants. Subsequently, the tariffs on Canada were also temporarily halted.
President Trump has hinted at the introduction of further tariffs, including a potential 10% duty on all goods entering the United States.
Understanding Tariffs and Their Impact
Tariffs are taxes imposed on imported products entering the U.S. market. The most prevalent form is the ad valorem tariff, which is a percentage-based tax on the value of the imported goods. This was exemplified by Trump’s 25% tax on goods such as avocados and lumber from Mexico and Canada.
Another category is ‘specific’ tariffs, which involve a fixed fee per unit of the imported product, such as a $1 tariff on each avocado from Mexico. Additionally, there are “tariff-rate quotas,” which activate tariffs once imports exceed a predetermined volume. For example, under the first Trump administration in 2018, a tariff-rate quota was applied to washing machines, taxing the first 1.2 million units at 20% and any subsequent units at 50%.
Financial Responsibility for Tariffs
Importing companies, such as Walmart or Target, are required to pay tariffs to U.S. Customs and Border Protection, which then allocates these funds to the United States’ General Fund.
Contrary to President Trump’s claim that foreign nations bear the cost of these duties, economic experts argue that the financial burden ultimately falls on American consumers. Large importers typically transfer the tariffs’ costs to consumers, leading to higher prices for goods. In some cases, foreign producers may reduce their prices to maintain competitiveness, while U.S. businesses might absorb some of the tariff costs to retain their customer base.
According to an estimate by ING, if all proposed tariffs are implemented, the average American could experience an increase of up to $2,400 in expenses annually as long as the tariffs remain active.
Potential Effects on Inflation
The introduction of these tariffs would escalate the current U.S. effective tariff rate from 2.4% to an unprecedented 31%, surpassing historical levels seen during President McKinley’s era in the 1890s and the Smoot-Hawley Tariff Act of the 1930s, according to Capital Economics.
This significant rise in tariffs is expected to drive inflation upwards, potentially increasing the annual rate from approximately 2.9% to around 4%, which is double the Federal Reserve’s target of 2%. This inflation rate mirrors the levels seen in mid-2023 when the Federal Reserve maintained high-interest rates in an effort to control inflation.
“[I]mposing any of these suggested tariffs would generate a rebound in consumer price inflation this year, taking it further above target and making it harder for the Fed to resume loosening monetary policy,” stated Capital Economics in a report released on January 28.
Trump’s Rationale Behind Supporting Tariffs
President Trump advocates for tariffs as a means to achieve various policy objectives, including increasing government revenue and safeguarding American industries from foreign competition.
Both Trump and his administration officials, such as Treasury Secretary Scott Bessent, argue that the tariffs imposed during the previous administration had minimal impact on inflation due to their limited scope. However, Capital Economics notes that these initial tariffs targeted only specific Chinese imports and were “too small to matter” in terms of their inflationary effects.
In an October interview with the Economic Club of Chicago, Trump emphasized the importance of protecting existing and attracting new businesses to the United States, stating, “No. 1 is for protection of the companies that we have here, and the new companies that will move in because we’re going to have thousands of companies coming into this country.”
The success of these tariffs in bolstering the manufacturing sector remains debatable. The Brookings Institution observed that while certain industries, such as washing machine manufacturing at Whirlpool, saw job growth, the overall number of manufacturing jobs in the U.S. declined slightly during Trump’s first term, dropping from approximately 12.4 million to 12.2 million. This decline may be attributed to various factors, including the impact of the pandemic and broader economic challenges within the manufacturing sector.