By Catherine Dunn
President Donald Trump imposed 25% tariffs on Canada and Mexico and 10% on China on Saturday -- upending global commerce in what may be the start of a trade war.
"Today's tariff announcement is necessary to hold China, Mexico, and Canada accountable for their promises to halt the flood of poisonous drugs into the United States," the White House said Saturday evening in a post on X.
Tariffs on Canadian energy will be implemented at a lower rate of 10%, the White House said.
Trump has said the tariffs were in response to the countries' failures to stop illegal migrants and fentanyl from entering the U.S., and to address trade imbalances. Hardly any seized fentanyl comes from Canada and the government has taken measures to reduce drug trafficking and illegal migration, as has Mexico. The bulk of the trade deficit with Canada is due to Canadian energy exports.
Trump on Friday indicated tariffs are also coming on exports from the European Union and will hit sectors such as computer chips, pharmaceuticals, and steel.
The next step may be a trade war as countries retaliate. Canadian Prime Minister Justin Trudeau is scheduled to make an announcement at 6 p.m., sources told the CBC. Trudeau said Friday that Canada was "ready with a forceful and immediate response." Mexican President Claudia Sheinbaum has said Mexico is prepared with a "Plan A, Plan B, Plan C."
Economists expect widespread impact.
"These tariffs herald a new era of U.S. trade protectionism that is likely to affect a wide swath of America's trading partners, whether rivals or allies, and will significantly disrupt international commerce, " said Eswar Prasad, a professor of trade policy at Cornell University, in an email to Barron's on Saturday.
Investors have so far shrugged off the tariff threat, though markets sold off a bit Friday afternoon. Now that the details are coming into focus, investors will start gauging the impact on sectors and the economy more broadly.
Here's what to know:
How much trade is at stake?
China, Mexico, and Canada are America's largest trading partners, accounting for roughly 40% of U.S. imports, worth more than $1.3 trillion, according to the Council on Foreign Relations. The U.S. imported $529 billion in goods and services from Mexico, $482 billion from Canada, and $448 billion from China in 2023.
More broadly, the U.S. imported $3.2 trillion worth of goods in the last 12 months; how much would be tariffed is an open question, as are the pass-through effects on companies, consumers, and the economy.
What sectors are most at risk?
Energy, autos, and agriculture face some of the biggest hits. Canada supplied 60% of crude oil imports to the U.S. in 2023, about 4 million barrels a day. That crude largely flows from Alberta by pipeline to American refineries that turn it into gasoline and other products.
"Since crude oil is the largest refinery input cost, higher tariffs could immediately reduce refinery profitability," the Congressional Research Service said in a January report.
Refiners in the Midwest rely on heavy Canadian crude, blending it with lighter sweeter domestic crude to make gasoline. Canadian crude is now discounted to WTI, but prices are almost certain to rise with tariffs because refiners have few good substitutes.
Canada also sells electricity to the U.S. from New England to the Pacific Northwest. The value of power sales from Canada to the U.S. was $3.2 billion in 2023, according to the U.S. Energy Information Administration.
The auto industry may have the most to lose. Mexico and Canada have spent decades integrating auto operations with factories near the borders for parts and final assembly of vehicles. Last year, Mexico supplied with the U.S. with nearly 43% of imported motor vehicle body parts through November, and Canada sent over 25%, according to research firm Trade Partnership Worldwide.
The industry faces tariff increases from nearly $4 billion a year to over $68 billion, making it the hardest hit by dollar amount, according to a report by PwC.
Nearly every major car maker would be impacted. More than 40% of Volkswagens sold in the U.S. originate from Mexico or Canada, according to The Wall Street Journal. Honda Motor, Stellantis, Nissan, and General Motors also have above-average industry exposure, the Journal reported.
Cars and parts cross borders multiple times, potentially exposing them to tariffs that could raise costs. "The imposition of tariffs at each stage of fabrication would be disastrous," researchers for the Peterson Institute for International Economics said in a post on January 17.
What's the economic impact?
Tariffs take time to work through the economy as companies seek substitute products, shift manufacturing, absorb costs, and pass on higher prices to consumers and businesses. There are both macro and microeconomic effects, and much debate about the impact.
The effective tariff rate on all goods is now 2.3%, according to JP Morgan. Boosting it to 10% would amount to a roughly $250 billion tax, "assuming no change in nominal import values" on $3.2 trillion of goods, the bank said in a Jan. 10 report. Consumer prices may rise 0.3% to 0.6% and gross domestic product could take a hit of 0.4% to 1.0%.
Consumers might feel the sting through price increases for everyday items like food, beer, and gasoline.
Mexico accounts for 23% of U.S. agriculture imports, including 63% of vegetable imports and 47% of fruit and nut imports. The U.S. bought more than $3.1 billion worth of avocados and more than $2.7 billion in raspberries, blackberries, and strawberries from Mexico last year, according to Trade Partnership Worldwide data.
Along with ubiquitous avocados and berries, Mexico is a major supplier of imported beer and spirits like tequila, products that could see near-term price hikes.
Meat and whiskey could get more expensive. Americans purchased north of $3 billion in beef and pork products from Canada, for instance. Products like Canadian whisky would be pricier.
Agricultural prices are likely to react swiftly because they have short production lead times. But manufactured goods with longer lead times may also soon be impacted, Prasad said, "even in cases where manufacturers and importers have a greater ability to absorb some of the costs of tariffs."
"For products such as automobiles with complex supply chains for components that often cross borders multiple times, the effective tariff hikes could be even greater and, therefore, add to the price pressures," he added.
What happens next?
Canada and Mexico have indicated they would hit back with tariffs on U.S. exports to their countries.
Retaliatory tariffs may at first hit products in Republican-oriented states for maximum political impact, such as Florida orange juice and Kentucky bourbon. Canada hasn't ruled out export taxes on energy. Mexico retaliated against U.S. tariffs with duties on U.S. farm and steel products in 2018. The playbook this time may start with agricultural products, according to the Atlantic Council.
The legality of Trump's tariffs is uncertain, partly because the U.S. has a free-trade agreement with Canada and Mexico. The World Trade Organization would be a venue to lodge complaints, but that would take considerable time to be resolved.
The key is "whether the president can do this under international law without invoking some sort of legal complaint under international law," Stanford law professor Alan Sykes told Barron's. "The answer, with respect to the WTO, is no."
Sykes adds that Trump was sued in the WTO and lost in his first administration, and "doesn't really seem to care about WTO compliance at this point."
How will markets react?
Despite selling off a bit on Friday, financial markets have been calm and generally upbeat. There's an expectation that the tariffs may be short-lived or a negotiating tactic by Trump that will result in a detente with major trading partners, containing the damage.
"Markets appear to be relatively sanguine," Ned Davis Research said in a note on Friday. "Although markets aren't infallible, we always respect their message, especially when it is widespread. As long as this is the case, we wouldn't be too quick to turn bearish on the markets."
Among the positives are new highs in U.S. and European equities, Treasury yields falling, and spreads on emerging-market bonds falling to their lowest levels since 2007, according to Ned Davis. None of that indicates a market worried about a trade war.
That said, currency volatility will increase as the U.S. dollar strengths and other currencies weaken. And if tariffs prove more widespread and lasting, the effects would be recessionary in countries like Canada and Mexico, while also hitting Europe, China, and emerging markets. None of that would be good for U.S. financial markets or companies, impacting U.S. sales abroad and denting corporate profit growth.
Don't look for safety in AI or the Mag-7; companies like Apple, Nvidia, and Tesla would also be swept up in a trade war.
Write to catherine.dunn@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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February 01, 2025 17:25 ET (22:25 GMT)
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