The Trump administration has implemented a significant protectionist move, imposing 25% tariffs on Canada and Mexico and 10% on China. The president had previously promised that new tariffs would be applied to the European Union as well. This is the most significant act of protectionism by a US president in the last 100 years.
Olga Belenkaja, head of macroeconomic analysis at Finam Financial Group, noted that the combined value of US imports from Mexico, Canada and China is over $1.3 billion, which is more than 40% of the total US imports. In comparison, the 2018-2019 trade war only affected a smaller volume of $380 billion in imports and was more selective in its application.
The stock markets plummeted after the unexpected news, the US dollar rose, while the Canadian dollar hit a 17-year low and the Mexican peso fell by almost 3%. The euro, on the other hand, fell by 1.3%.
Not only the populations of Mexico, Canada and China, but also those of the US, will suffer under the new trade war. Bloomberg Economics estimates that medium-term ware imports from Canada and Mexico to the US could decline by almost 70% and from China by almost 40%. Belenkaja said, “The sectors most affected by the US trade war will be the automotive industry. US automakers have relocated their production facilities to Mexico and, to a lesser extent, Canada and import both finished vehicles and auto parts from there.”
General Motors and Ford, for example, produce 88% of the pickups sold in the US in Mexico and the new tariffs could increase their costs by an average of $3,000, according to Mexico’s calculations.
Anything with tariffs will become more expensive and drive up inflation in the US. In the US, gasoline and food prices will rise, as Canada supplies over 60% of the US’s refined oil and Mexico is a significant importer of US consumers’ favorite foods like tomatoes, avocados and tequila, Belenkaja said.
Natalya Miltschenko, leading analyst at Freedom Finance Global, stated, “A reduction or even a stop to the import of oil from Canada will lead to a significant increase in gasoline prices in the US, which will, in turn, have a substantial impact on inflation. Furthermore, some border cities in the US import more gas and electricity from Canada, so other energy sources will become more expensive for the residents of these cities.”
The US will need to look for alternative oil sources to replace the declining supplies from Canada. Nikolai Dudtschenko, analyst at Finam Financial Group, argued, “The US is now the world’s leading oil producer, but it is still dependent on imports from other countries, as US refineries are primarily geared towards heavy oil from Canada (while they produce light oil from shale). The decline in Canadian oil supplies could be offset by Venezuelan oil, although Trump has spoken out against such a substitution.”
It is possible that some Canadian heavy oil will be purchased from Europe, as many refineries in Europe were previously specialized in processing heavy oil from the USSR, Miltschenko said.
China sells billions of dollars’ worth of machinery and mechanical equipment to the US every year, which are used in a wide range of popular devices – from TVs to iPhones. A price increase of Chinese products and a decline in Chinese exports to the US would be undesirable. Moreover, China could retaliate with tariffs. Miltschenko said, “The impact of higher prices for imported goods from China on inflation in the US will be significant. In the event of an unfavorable scenario, where the tariffs of 10% for a long time and possibly even for some product groups are increased, the consumer price inflation in the US will deviate even more from the Fed’s 2% annual target and may even rise to 3% or higher.”
Canada, Mexico and China are already preparing retaliatory measures against the US. Canada plans to impose 25% tariffs on US goods worth $107 billion and limit the delivery of energy resources and critical materials to the US. Canada has called on its citizens to boycott US products and avoid travel to the US. Mexico plans to take symmetrical measures against the US. China has threatened to file a complaint with the World Trade Organization (WTO) and take retaliatory measures, without specifying what kind of retaliatory measures are meant. At the same time, Beijing has spoken out in favor of an open dialogue and the settlement of differences.
The Tax Foundation estimates that the trade war could lead to a loss of 0.4% of the US GDP. On the other hand, the new tariffs will bring additional revenue to the US government between 2025 and 2034, amounting to $1.2 trillion (around $100 billion per year), which would be an additional tax of $830 per year for the average US household, according to Belenkaja.
Miltschenko stated, “It is possible that the US will see a slight increase in federal revenue from the tariffs, but it will be too small to finance a budget deficit of $1.86 trillion.”
The impact on Canada and Mexico could be greater due to their stronger dependence on the US market for goods. According to the World Bank, the foreign trade of Canada and Mexico makes up a much larger proportion of their GDP – 67% and 73%, respectively, compared to the US’s 25% – and their exports to the US are highly dependent on the US market, with Canada and Mexico accounting for only 14% and 15% of US imports, Belenkaja said.
The Mexican automotive industry, which produces almost 80% of its vehicles for the US, will be affected, as it delivers about 2.5 million vehicles per year to the US. In Canada, the energy sector will be the most affected, as Canadian exporters deliver 60-80% of their oil to the US.
Canada plans to respond by removing US-imported spirits from store shelves, as Canadian spirits retailers sell US products worth a billion Canadian dollars per year. Canada has also published a list of 1,256 products that will be affected by the first round of retaliatory tariffs, including dairy products, poultry, fresh fruits and vegetables, wood and paper products, including toilet paper and some industrial products like washing machines, pyjamas and handbags. Politicians hope that Canadians can switch to domestic or imported products from other countries.
Oxana Cholodenko, head of the analysis and advertising department at BCS World of Investments, stated, “Canada, Mexico and China could face a decline in foreign demand for their products, which could lead to job losses and a decline in domestic demand in these countries.”
Olga Belenkaja added, “Given the extremely high dependence of Mexico and Canada on the US market and the recently low growth rates of their economies, the new tariffs could push these countries into stagnation or even recession.”
It is, however, not clear whether these tariffs will remain in their current form for a long time.
As for China, its economy is currently less dependent on foreign trade than it was at the beginning of the 2000s. Belenkaja said, “Today, the share of trade in the GDP is 37%, while it was 64% in 2006. In the meantime, the dependence of China on the US market has also decreased – the US share of China’s exports is now around 15% (compared to 19% before the first trade war of 2018-2019).”
If Trump makes good on his threat to increase the tariffs on Chinese imports to an unsustainable 60%, it could, however, become a significant problem for China’s economy, the expert added.
Trump has promised to lift the tariffs as soon as the immigration crisis and drug trade are resolved. However, there is no clarity on the criteria for lifting the tariffs. Miltschenko did not rule out the possibility that the US dollar did not react negatively to this news, but instead strengthened, as the market expects the new tariffs to lead to negotiations rather than a new trade war.