This story is an updated version of this story
President Donald Trump is going forward with 25% tariffs on goods imported from Canada and Mexico into the US.
Trump first said the tariffs would start on February 1, but then gave the two countries’ leaders an extra month to prove they were cracking down on illegal immigration and drug trafficking into the U.S.
US stock markets sank in response to the announcement capturing the real mood of the markets.
While Trump’s American First Trade Policy aims to put a check on the country’s international dependence through investment and productivity within the U.S. borders, it could backfire and instead lead to retaliatory tariffs, leading to trade wars and isolating America from being a part of critical trade pacts.
Critics have repeatedly warned that Trump’s tariffs would not only damage all the economies involved (namely U.S., Canada, Mexico and China), but also lower the GDP of each.
“No room left for Mexico or for Canada. The tariffs, you know, they’re all set. They go into effect tomorrow, “ Trump said at the White House on Monday.
Retaliatory tariffs
Canada is set to retaliate.
In a statement late Monday, Canadian Prime Minister Justin Trudeau said, “Canada will not let this unjustified decision go unanswered. Should American tariffs come into effect tonight, Canada will, effective 12:01 a.m. EST tomorrow, respond with 25% tariffs against $155 billion of American goods.”
Canadian Foreign Minister Melanie Joly also told reporters later on Monday, “Let’s be clear, if Trump is imposing tariffs, we’re ready.”
Canada’s response to U.S. tariffs will roll out in two phases, as announced by Trudeau last month. The first phase, targeting $30 billion worth of U.S. goods, takes effect immediately.
A second round, covering a broader range of American products valued at $125 billion, is set to follow 21 days later after a public comment period.
On Feb. 1 this year, Mexico had vowed retaliation but had not given any details.
U.S. runs a trade deficit with both of its largest trading partners
Impact on consumers
Consumers will face the brunt of the tariffs in the form of high prices and thats a risk of imposing high tariffs, especially on leading trading partners. More imported goods will get expensive leading up to inflation—an issue the Trump administration promised to tame.
A free trade agreement – USMCA (United States-Mexico-Canada) formerly known as NAFTA, keeps goods traded between the U.S., Mexico, and Canada exempted from tariffs. While the level of impact is difficult to figure at this point, it is evident that certain products in the agriculture, automobile and energy sector— imported in large volumes/value, will likely to be hit first and most. Price increase will start showing up slowly and gradually as fresh imports from the impacted countries start to flow into the U.S.
Impact on the U.S. dollar
The movement of currencies will be interesting to watch and will obviously be first to impacted first because of exchange rates.
Demand for foreign currency can fall if lesser volumes of goods are coming into the U.S. In such a case, there will be falling demand for currencies, making the domestic currency stronger than the foreign This should be more of a real-time impact but as impacted countries retaliate (by imposting tariffs on U.S. exports.) or push back, the currency might see an opposite effect.
Having said that, like everything else in trade economics, there will be many external and indirect factors that could indirectly impact the trade balance including central bank policies and reduced foreign investment.
Impact on inflation
According to a recent study by Brookings, the tariffs could push the US inflation up by more than 1.3 percentage points.
In Canada, inflation would initially decrease as U.S. tariffs slow economic growth. However, if Canada responds with 25% tariffs of its own, inflation would rise, reflecting higher costs for imports from the U.S, according to the analysis.
Similarly, Mexico would see a sharp decline in inflation—around 9%—following US tariffs due to weaker economic growth. If Mexico imposes a 25% tariff on US imports, this decline would be reduced to about 6 percentage points.
