The Iraq War began with shock and awe, a combined air and ground campaign meant to shock the Iraqi Army into submission. President Trump appears to be taking a similar tact with the opening salvo of this trade war, announcing wide-ranging tariffs on goods from Mexico, Canada, and China over the weekend.
The White House announced 25% tariffs on goods from Mexico and Canada, two of our three largest trading partners. China was hit with a 10% tariff. These tariffs are going into effect almost immediately, on Tuesday, leaving no time for companies to prepare for the changes. All three nations have vowed a response, with some retaliatory actions already announced. Additionally, Trump has also warned that European tariffs are likely, indicating that this is only the first wave of potential tariffs.
The impact of these tariffs is uncertain. Frankly, it’s hard to predict where things will be in the next week, much less how economies will be affected in the coming months. My goal is to provide a baseline understanding, along with keys to watch as the situation evolves.
Trump's New Tariff Question & Answers
What are the new tariffs?
10% tariff on goods from China.
De Minimis entries from China will no longer be allowed after Tuesday.
25% tariff on most goods from Canada and Mexico.
10% tariff on Canadian energy.
Why are the tariffs being implemented?
Officially, tariffs are being implemented to incentivize each country to reduce the flow of fentanyl into the US.
Unofficially, the tariffs are meant to reduce the trade deficit between the US and each country.
What is a trade deficit?
In the simplest terms, a trade deficit means that they sell more goods to us than we sell to them.
The trade deficit only considers the export of physical goods, resources and products.
Do trade deficits actually matter?
While economists argue over the importance of a trade deficit, it’s clear that President Trump places significant value on the metric.
Personally, I think focusing solely on the trade deficit is an outdated measure of economic competitiveness. It frames international trade as a zero-sum game, rather than one from which both sides can benefit.
What do we import from Canada?
Oil & Gas (including crude oil, refined petroleum products, and natural gas)
Vehicles (passenger cars, trucks, and automotive parts)
Machinery (including industrial machinery, computers, and related parts)
What do we import from Mexico?
Vehicles (passenger cars, commercial vehicles, and automotive parts.)
Electrical Machinery (including electrical appliances, wiring, and equipment.)
Machinery (non-electrical) (Including industrial machinery, engines, pumps, and other related equipment.)
How important is US trade to the economies of Canada and Mexico?
Mexican exports to the US made up 17% of their GDP in 2023.
Canadian exports to the US made up ~30% of their GDP.
How important are US exports to Canada and Mexico to the US economy?
Combined, US exports to both Canada and Mexico make up only ~2.5% of US GDP.
Certain industries are likely to be hit harder by counter-tariffs, specifically the alcohol industry. Canada has already announced restrictions on American alcohol imports.
My Thoughts
Knowing President Trump’s propensity for making hyperbolic statements to establish a negotiating position, anything is possible. I think it’s likely Trumps new tariffs go into effect on Tuesday, but it’s far from certain.
It’s totally possible that President Trump holds a press conference on Monday afternoon to announce a remarkable, beautiful trade deal that justifies delaying or canceling the announced tariffs.
The following thoughts are predicated on the idea that the tariffs do go into effect on Tuesday, as announced.
This will likely be a shock to the markets initially, as the market processes the potential impacts.
The speed of implementation is important as it leaves companies without time to prepare. Previous tariffs were announced well before going into effect, providing companies with time to speed up orders and identify alternative suppliers. Announced on Saturday and going into effect on Tuesday is incredibly quick.
US manufacturing supply chains are deeply linked to Mexico; it will take significant time for companies to shift their supply chains. It will take plenty of time for companies to even analyze the effect on their bottom line stemming from these tariffs.
Tariffs on Chinese goods were expected, however the fact that Canada and Mexico have higher tariffs than China is a bit of a head scratcher. Honestly, I can’t really understand why they’re being hit harder than China.
Removal of the De Minimis rule for Chinese imports is actually a pretty big deal. Right now, companies like Temu, Alibaba, and Shein use the De Minimis rule (Section 321 of the Tariff Act of 1930) to get around import duties, screening and taxes when sending goods to the US. They do this by breaking large orders into smaller shipments that are considered de minimis, as the total shipment value is less than $800. More than 1.3 billion de minimis packages were processed in 2024. If the Trump administration closes the de minimis loophole, prices on Temu could increase by as much as 20%.
Duration matters. 1-2 weeks of tariffs is a headache, but 1-2 quarters could be an aneurysm.
The longer tariffs last, the more impact they will have on earnings. Many manufacturers have gross profit margins (Sales Price – Cost to Manufacture) less than 25%. GM’s gross profit margin for Q4 2024 was just under 12%. If tariffs continue for long, expect to see earnings of US car manufacturers take a hit, as much of the manufacturing process takes place south of the border. According to The Wilson Center, the average car crosses the US-Mexican border 8 times during its production. With a 25% tariff, this will get expensive quickly.
Tariffs, particularly broad tariffs, are likely inflationary if implemented for very long at all. The most immediate impact will be on the price of fruit and vegetables imported from Mexico, however the impact could spread into other areas of the economy. Increased inflation could have second-hand effects at the Federal Reserve. While the market is currently pricing a single rate cut this year, it’s likely that tariffs implemented for more than a (very) short period would eliminate the possibility of cutting this year. It can take time for inflation to filter through and I have a feeling that the Fed would prefer to take a wait-and-see approach to cutting rates.
President Trump pointed to the US stock market as a barometer of success during his first term. Focusing on trade deficits via tariffs could be at odds with his focus on the markets, at least in the short term. It will be interesting to see how he balances his goal of a growing market with reducing trade deficits. He seems to view international trade as a zero-sum game in which one nation loses while another wins.
What Others are Saying
“In practical terms, the new tariffs will work against US competitiveness by reducing the access domestic manufacturers have to cheap imported components”, said Wendy Cutler, a former US trade negotiator who now leads the Asia Society Policy Institute.
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