President-elect Donald Trump has announced plans to impose significant tariffs on goods from Mexico, Canada, and China immediately upon taking office on 20 January. Citing concerns over illegal immigration and the fentanyl crisis, Trump pledged a 25% tariff on all imports from Mexico and Canada and an additional 10% tariff on Chinese goods, escalating tensions with some of America’s largest trading partners.
In a series of posts on Truth Social, Trump stated, “On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders. This Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!”
Trump added that the 10% tariff on China was a response to the country’s failure to curb the flow of fentanyl precursor chemicals, which he claimed fuel drug production in Mexico.
While Trump’s rhetoric has been characterised as a negotiating tactic, the potential for economic fallout has alarmed businesses and governments alike.
What are tariffs and how do they work?
Tariffs are basically taxes imposed by a government on imported goods. These charges are typically calculated as a percentage of the value of the imported goods and are paid by the importing party, such as businesses or distributors, who will usually pass the increases on to consumers.
The primary purpose of tariffs is to make imported goods more expensive, encouraging consumers and companies to buy domestically produced products instead. Governments may use tariffs to protect domestic industries from foreign competition, generate revenue, or achieve specific policy goals, such as penalising a trading partner for perceived unfair practices.
However, tariffs often provoke retaliatory measures from affected trading partners, who impose their own tariffs on exports from the initiating country. This cycle can escalate into a trade war.
Backlash
The Chinese Embassy in Washington swiftly responded to Trump's comments, cautioning that a trade war would hurt both nations. Spokesperson Liu Pengyu said, “China-US economic and trade cooperation is mutually beneficial in nature. No one will win a trade war or a tariff war.” Liu added that China had taken concrete steps to combat drug trafficking, highlighting recent bilateral agreements.
Canada and Mexico have refrained from directly addressing the tariffs, but emphasised ongoing collaboration with the US on border security and drug enforcement.
Together, Canada and Mexico account for around 34% of US exports and 30% of imports.
China accounts for around 15% of imports and 7.5% of exports.
Economic consequences
Trump’s announcement has already roiled financial markets, with the Australian dollar hitting a seven-month low (currently 64.89 US cents as of the time of writing) and the ASX 200 closing down 0.69%.
Economists have warned that the proposed tariffs could raise prices for American consumers and disrupt supply chains. A report from the Peterson Institute for International Economics estimated the tariffs could cost US households an average of US$2,600 per year.
The US-Mexico-Canada Agreement
The proposed tariffs cast uncertainty over the future of the US-Mexico-Canada Agreement (USMCA), a trade pact Trump himself negotiated during his first term.
Commentators have noted that unilateral tariff increases would likely violate the agreement, since tariffs on products originated from the parties to the agreement can only be increased in exceptional or justified circumstances.
However, enforcement mechanisms are somewhat toothless. The agreement imposes no direct penalties, and cannot compel compliance, although it does provide for tariff-based retaliation or suspension of benefits as enforcement tools. Long term, the US would lose credibility in terms of adhering to future trade pacts.
Arturo Sarukhan, Mexico's former ambassador to the US, suggested that tariffs could lead to a renegotiation of the agreement.
What happened last time round?
During the first Trump administration, tariffs were a key element of the "America First" economic policy. In January 2018, the administration imposed tariffs of 30–50% on solar panels and washing machines, targeting imports from various countries, including China, South Korea, and others. In March 2018, additional tariffs of 25% on steel and 10% on aluminium were introduced, initially applying to most countries, including China, Russia, and Japan. In June 2018, these steel and aluminium tariffs were extended to Canada, Mexico, and the European Union, after earlier temporary exemptions for these trading partners expired.
The administration particularly targeted China, with tariffs escalating in both scope and intensity, ultimately sparking a trade war. By late 2019, tariffs covered nearly $360bn worth of Chinese imports, including consumer products such as electronics, clothing and household items.
These measures were justified as a means to reduce trade deficits, protect domestic industries, and address intellectual property concerns. However, trading partners, including Canada, China, and the EU, implemented retaliatory tariffs on US goods, targeting politically sensitive industries like agriculture and manufacturing, often in key Republican districts.
The effects of the tariffs were widely criticised by economists for their negative economic impact. Studies found that US consumers faced higher prices, with intermediate goods increasing by 10–30% and washing machines by 12%. The tariffs reduced aggregate real income by US$1.4bn per month and increased consumer tax burdens by US$3.2bn monthly. Job losses were significant, with the steel tariffs contributing to 75,000 fewer manufacturing jobs and overall employment declines in affected sectors. Retaliatory tariffs caused a 9.9% drop in US exports of targeted goods, particularly agricultural products. The Congressional Budget Office estimated a 0.5% reduction in GDP and a US$1,277 decrease in average real household income in 2020.
What tariffs are currently in place on China?
Measures implemented during the Trump administration were continued under President Biden. These tariffs, known as "Section 301 tariffs" because of the section of the Trade Act of 1974 under which they are imposed, have been subject to various adjustments and reviews. Currently, they apply to over US$300bn worth of Chinese imports, with rates varying from 7.5% to 25% across different product categories.
In September this year, the Biden administration finalised increases in tariffs on certain Chinese goods, including a 100% tariff on electric vehicles, a 25% tariff on lithium-ion EV batteries and a 50% tariff on photovoltaic solar cells.
