Trump’s tariff gamble: Trade war or negotiation tactic?
US President Donald Trump will put in place 25 percent tariffs on imports from Canada and Mexico and 10 percent tariffs on goods from China effective Saturday, the White House confirmed on Friday, ending weeks of intense speculations.
The tariffs are in retaliation for “the illegal fentanyl that they have sourced and allowed to distribute into our country,” White House Press Secretary Karoline Leavitt said.
“These are promises made and promises kept by the president,” she told reporters.
Tariffs are key to Trump’s economic strategy, which he views as a tool to boost growth, protect jobs, and increase tax revenue.
However, he faces political and economic risks just two weeks into his second term, as potential tariffs could raise prices and disrupt key industries despite his pledge to curb inflation.
Tariffs are paid by US businesses to the government on purchases from abroad and the economic weight can fall on importers, foreign suppliers or consumers.
Tariffs set to push food and oil prices higher
Analysts warn that tariffs will immediately impact consumers, especially in food and oil prices.
“In particular, 60 percent of all oil imports that the US brings in are from Canada. So that’s going to lead directly to higher domestic prices for oil, particularly at the gas pump,” Matthew Martin, Senior US Economist from Oxford Economics, said.
“On the flip side, Mexico is a large source of foodstuffs for the US, and so goods brought in from there are going to be again paying this additional fee of 25 percent. And consumers are going to see that at the grocery stores,” he added.
About two-thirds of US vegetable imports and half of its fruit and nut imports come from Mexico, according to the United States Department of Agriculture (USDA). That includes nearly 90 percent of its avocados, as much as 35 percent of its orange juice, and 20 percent of its strawberries.
Together, the US does about $1.6 trillion in annual business with Canada, Mexico and China, according to latest data the UN Comtrade.
Trump aims to leverage tariffs as both negotiation tools and a means to influence foreign policy, particularly on immigration and the drug trade.
“We continue to believe that this is still a negotiation tactic and in the end 25 percent tariffs and the economic impact that they would have on Mexico and Canada will act as a deterrent towards actually implementing them,” Martin said.
Canada and Mexico ready to retaliate
Canada and Mexico have signaled readiness to impose retaliatory tariffs if needed, potentially sparking a broader trade conflict that could slow growth and drive-up inflation, according to analysts.
Canadian Prime Minister Justin Trudeau on Friday said all options are on the table if Trump goes ahead with the tariffs, but he did not give details.
No one — on either side of the border — wants to see American tariffs on Canadian goods.
I met with our Canada-U.S. Council today. We’re working hard to prevent these tariffs, but if the United States moves ahead, Canada’s ready with a forceful and immediate response.
— Justin Trudeau (@JustinTrudeau) January 31, 2025
“We’re ready with a response, a purposeful, forceful but reasonable, immediate response,” Trudeau said in a televised address to Canadians.
Mexican President Claudia Sheinbaum also said that Mexico has a “Plan A, Plan B, Plan C for what the United States government decides.”
‘Large repercussions’ for automobile industry
The US auto industry relies on a complex supply chain, sourcing parts from multiple countries, particularly Canada and Mexico.
Blanket tariffs on these nations would effectively tax Ford and GM’s US production.
In 2023, the US imported $69 billion in cars and light trucks from Mexico – its top supplier – along with $37 billion from Canada, according to S&P Global Mobility.
Additionally, $78 billion in auto parts came from Mexico and $20 billion from Canada. Key components, like the engines for Ford’s F-Series pickups and Mustang sports coupe, are made in Canada.
Many of these components cross the border multiple times throughout the manufacturing process.
“If you’re taking an automobile with pieces that are being kind of set back and forth and each time they’re hitting 25 percent, both coming in and going out, obviously that’s going to have large repercussions for the industry at large,” Martin said.
‘No winner in tariff war’: China
With Trump mulling more tariffs on Chinese goods, Beijing has vowed to defend its “national interests.”
Liu Pengyu, a spokesperson for the Chinese embassy in Washington, said the two countries should resolve their differences through dialogue and consultation.
“There is no winner in a trade war or tariff war, which serves the interests of neither side nor the world,” Liu said in a statement.
According to the Congressional Research Service, China was the fourth-largest US goods trading partner in 2023, with total trade reaching $575 billion.
It ranked as the fourth-largest market for US exports at $147.8 billion and the second-largest source of US imports at $427.2 billion.
When Trump levied punitive tariffs on Chinese goods in 2018 and 2019 during his first term, Beijing struck back with duties on American products like soybeans and corn, leading to lost sales for farmers in rural America.
Analysts say China has developed alternative markets and supply chains to mitigate the effects of US tariffs and Chinese companies are better positioned this time to absorb the impact.
“China is less reliant on the US, probably as a source to buy their goods and probably have found alternate routes to send their goods,” Martin added.
“Two areas that they have really started to get in roads are Europe and some of the other Southeast Asian countries as well. And so, I’m sure those markets have grown where the US has declined. So they might be in a better position.”
Blanket tariffs risk ‘global trade slowdown’
Economists generally agree that tariff threats can be inflationary and create ripple effects that harm the economy.
“First and foremost, it’s just going to be the impact to inflation that will necessitate prices going higher even if tariffs are kind of implemented over time; businesses are going to see an increase in costs and are likely to pass that along to the goods that consumers are ultimately buying,” Martin said.
Martin notes that as global supply chains have grown increasingly interconnected over the past two decades, disruptions caused by tariffs will have a significant impact.
“We’ve never seen kind of tariffs of this level. I think it will definitely lead to a global slowdown in trade,” he said.
