Last week, President Trump announced the implementation of significant tariffs on goods exported from Mexico, Canada, and China. These tariffs threaten to raise prices and slow economic activity across all four countries. While Congress would usually be involved in setting tariffs, the actions came in the form of three executive orders, with the President claiming the right to impose the duties using emergency authority to combat the flow of illicit drugs, notably fentanyl. The orders will impose 25% tariffs on all goods imported from Mexico and Canada (with the exception of Canadian energy products, where the rate is 10%), and 10% on goods imported from China.
Initially, the tariffs were set to take effect within days, but after discussions with Canadian Prime Minister Justin Trudeau and Mexican President Claudia Sheinbaum, the implementation for those two countries was postponed by 30 days. This delay raises questions about whether further negotiations could lead to adjustments or if it is simply a temporary pause before full implementation. This delay came as part of agreements in which both Canada and Mexico committed to strengthening border security measures, particularly to address concerns over illegal immigration and drug trafficking. Mexico agreed to deploy 10,000 National Guard troops to its northern border, while Canada pledged to enhance border enforcement efforts. Meanwhile, China responded with sharp criticism, calling the tariffs “unilateral and protectionist” and announcing specific countermeasures. Starting February 10, China will impose a 15% tariff on U.S. coal and liquefied natural gas (LNG) imports, and a 10% tariff on crude oil, agricultural machinery, and certain vehicles. Additionally, China has initiated an antitrust investigation into Google and added several other companies to its “unreliable entity” list, signaling a broader economic response to U.S. trade policies.
Uncertain Economic Impact
Given the fluidity of the situation and uncertainty around retaliatory measures and the length of time for which tariffs will be imposed, quantifying their economic impact is difficult at best. Still, there’s little doubt that tariffs could both raise prices and slow economic growth, particularly impacting industries reliant on global supply chains such as automotive, consumer goods, and technology. How inflationary tariffs will be will depend on both how much consumption of goods imported from these three countries is reduced and how much of the import tax will end up being passed on to consumers. Using some admittedly rough “back of the envelope” math, JPMorgan estimates the tariffs could increase the Consumer Price Index by just over 1%. This calculation ignores several factors, such as the degree to which importers or retailers absorb some of the cost, the countervailing effects of retailers trying to maintain their profit margins in the face of lower volumes, upward pressure on wages, and the impact of additional tariffs on other countries (Japan, Europe) that President Trump has threatened.
Tariffs would also reduce economic activity. The U.S. exported ~$760B in goods to Canada, Mexico, and China last year. Slower economic growth in these countries, along with retaliatory tariffs, could materially cut those exports. While the effects would be more severe for Canada and Mexico than the U.S., exports to the U.S. account for a far larger share of GDP for those countries than vice-versa. The Canadian and Mexican economies had less momentum than that of the U.S. entering 2025, with recent y/y GDP readings of 1.5% and 0.6%, respectively, compared to 2.5% for the U.S.
