By Jeanne Whalen
Supply-chain upheavals. Pricier avocados. Higher heating bills. And a happier U.S. steel industry.
The Trump administration Saturday said it will place 25% tariffs on goods from America's two top trade partners, Mexico and Canada, beginning Tuesday, saying they have failed to stop unauthorized migrants and drugs from entering the U.S. One exception is Canadian oil, which will receive a lower 10% import tariff.
The administration is also imposing an additional 10% tariff on goods from China -- the nation's third-biggest trading partner -- accusing it of flooding the U.S. with fentanyl. Trump also has described tariffs as a tool to protect and expand U.S. manufacturing.
The Trump administration said the levies will remain in place until the drug and migrant "crisis is alleviated." Canada and Mexico have prepared retaliatory measures to hit U.S. products with tariffs in kind.
If the trade battle persists, it promises to ripple through the American economy, affecting everything from grocery prices to the steel and energy industries.
In some sectors, a scramble has been under way for weeks to get ahead of tariffs by moving production lines and stocking up on imported supplies.
Here is what to expect over the coming weeks and months:
Confusion
North American businesses have gotten used to decades of tariff-free trade mandated by the North American Free Trade Agreement, and its 2020 successor, the United States Mexico Canada Agreement, USMCA.
So, some confusion is likely to follow the imposition of tariffs -- at least in the short term. Long lines of trucks could back up on bridges in Texas and Detroit if the rules aren't immediately clear, delaying deliveries.
Trump said several federal laws give him the authority to impose the tariffs, including the International Emergency Economic Powers Act, IEEPA, which allows presidents to regulate some commerce after declaring a national emergency.
Trade experts say legal challenges from Mexico, Canada and U.S. importers are possible, as are months of uncertainty for companies in all three nations.
Higher across-the-board inflation
The Federal Reserve's preferred measure of inflation showed that consumer prices rose 2.6% in December over a year earlier. A 25% tariff on goods from Canada and Mexico would bring the inflation rate up to about 3.2%, keeping it well above the Fed's 2% target, according to Capital Economics, an analysis firm.
The Trump administration has downplayed the risk of inflation and said that higher tariffs will bring more revenue to federal coffers. "Tariffs don't cause inflation. They cause success," Trump said Friday.
Pricier groceries
Grocery-price increases could be the inflation consumers notice first if tariffs force importers to pay 25% more for food, economists say.
Mexico provides about half of U.S. fresh produce imports and is a particularly important supplier in the winter, according to Ed Gresser, a former assistant U.S. trade representative now working at the Progressive Policy Institute. More than 80% of U.S. avocados come from Mexico, according to the U.S. Agriculture Department.
Canada is a big supplier of everything from kidney beans to cherry tomatoes, which are grown in huge greenhouses near the U.S. border.
The U.S. is no slouch when it comes to growing food, so some domestic alternatives will be available. But economists warn that higher prices for imports might prompt domestic suppliers to raise their prices, too.
Auto-industry tumult
Domestic and foreign automakers have built a complex web of factories all over the U.S., Canada and Mexico. Parts and half-finished vehicles sometimes cross the northern or southern border several times before production is complete. Hitting those import crossings with a 25% tariff will raise costs and possibly cause automakers to raise prices, though U.S. consumers are already fed up with auto prices that surged during the pandemic.
Some auto-parts manufacturers in Mexico and Canada are adding overtime shifts and stepping up deliveries to the U.S. in efforts to get ahead of tariffs, while others are considering moving some manufacturing lines to the U.S., said Ambrose Conroy, chief executive of the consulting firm Seraph.
General Motors this week said it was expediting vehicle imports from Mexico and Canada and considering ways to potentially build more pickups domestically, where it has extra factory space. More than a third of the company's U.S. sales are estimated to come from vehicles produced in Mexico and Canada.
Steel-industry backing
The steel-and-aluminum sector has long called for protection against low-cost competitors overseas, and likely would applaud stiff tariffs. A coalition of domestic producers last week urged Trump to impose new tariffs on Mexican steel and aluminum. They argued that Mexico's producers were flooding the U.S. market with steel and aluminum in violation of Mexican commitments, leading several U.S. plants to close or idle.
"For decades, so-called 'free trade' policies have hollowed out America's industrial base, destroyed domestic supply chains, and left American workers at the mercy of foreign governments and multinational corporations," Zach Mottl, Chairman of the Coalition for a Prosperous America, which represents domestic steel, aluminum and other manufacturers, said in a statement Saturday.
Domestic buyers of steel probably would have the opposite view. Trump's steel tariffs during his first term caused U.S. prices to rise, making it hard to plan big construction projects and to deliver them on budget, industry executives say.
Reshoring (maybe)
If a large chunk of manufacturing moves home permanently in response to tariffs, it would fulfill one of Trump's stated goals for the levies. That's a big if, economists say. Trump is widely seen as using tariffs as a bargaining cudgel and not necessarily as a permanent tool, said Brad Setser, a former U.S. Treasury official and now a senior fellow at the Council on Foreign Relations.
"You're not going to rearrange production if you think there will be a negotiation that will take the tariffs off," he said. "In the short term you're going to get some disruption and a lot of people paying higher costs."
Energy-price increases
New tariffs could raise U.S. prices for gasoline, jet fuel and home heating oil, because Canada supplies about 60% of U.S. crude-oil imports and Mexico another 10%, Gresser said. Together, those imports make up about 30% of the crude oil used in the U.S. Many domestic refineries are set up to process Canadian oil, and adjusting away from it isn't a simple task, he added.
The lower 10% tariff on Canadian energy shows that the Trump administration is wary of angering U.S. consumers with higher gasoline prices. Still, Canada could drive up prices if it retaliates with measures that curtail oil shipments.
If U.S. refining or auto production slows down or grinds to a halt, that would likely undermine economic growth, economists say.
Costlier consumer electronics
Trump's extra 10% tariff on goods from China adds to the array of levies the U.S. already charges on Chinese imports.
During Trump's first administration and again under former President Joe Biden, the U.S. placed new tariffs on a range of industrial goods from China, such as semiconductors and steel, to protest what the U.S. has long called China's unfair trade practices. Most consumer products were spared, though.
The new across-the-board 10% tariff on Chinese goods will hit many consumer items for the first time, sparking possible retail price increases and retaliation from China. Consumer electronics, including smartphones and laptops, are one category that could face price increases.
Write to Jeanne Whalen at Jeanne.Whalen@wsj.com
(END) Dow Jones Newswires
February 01, 2025 18:54 ET (23:54 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
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