Canada’s economy could shrink by 3.6%, while Mexico could take a 2% hit due to Trump’s tariffs. India has currently been spared. It is preparing a full-fledged response plan in case Trump levies tariffs on it.
US President Donald Trump has levied new tariffs on Canada, Mexico and China. He did this in response to his concerns about illegal immigration. Additionally, he is addressing drug trafficking, which are the two promises on which he was elected.
Trump signed an executive order on Saturday. It imposes 25% tariffs on imports from Canada and Mexico. The order also adds an additional 10% levy on goods from China.
Canada and Mexico said they will respond with retaliatory tariffs. China announced it would take corresponding countermeasures. It aims to firmly safeguard its rights and interests. It also said it would challenge the order through the World Trade Organization, according to Reuters.
What Do Tariffs Mean For Canada And Mexico?
The new policy reverses the virtually duty-free trade among the three North American nations. This trade arrangement has existed for several years.
The tariffs will have no exemptions. The executive action by Trump will close the so-called de minimis loophole. This loophole had allowed shipments of $800 or less to come into the US tax-free. It was a key provision used by many American small businesses. It was also used by Chinese e-commerce companies such as Shein and Temu. Trump administration officials said the loophole prevented customs officials from properly inspecting those packages.
Notably, an important carve-out includes a 10% tariff on Canadian energy products. Many Americans rely on Canadian energy products, including oil, electricity and natural gas, for fuel and home heating. The cost of those items could rise when the tariffs hit.
What Does The Trade War Mean For US Consumers?
Trump acknowledged on social media platform Truth Social that the new tariffs could cause “some pain”. He insisted his vision for the country “will all be worth the price that must be paid”.
US consumers may face increased expenses. They might need to spend more on a wide range of products. These products include vegetables, meat, cellphones, and cars. Some companies may pass on the cost of the tariff. Many others are likely to raise prices on their products.
For example, fresh produce from Mexico could see an uptick in prices. This includes avocadoes, tomatoes, and strawberries. This change might happen potentially within a couple of weeks of the tariffs going into effect.
Beers and tequila could also be hit by new tariffs. In 2023, nearly three quarters of US agricultural imports from Mexico included vegetables, fruit, and beverages. They also consisted of distilled spirits, according to the US Department of Agriculture.
The US imports a range of agricultural products from Canada. These include meats and grains. A 25% tariff on the neighbor could mean a rise in the prices of beef and maple syrup.
Data from the Labor Department showed that grocery prices rose again in December. They were relatively flat in late 2023 and early 2024. The increase was led by the price of eggs, according to The New York Times.
Another challenge that the American buyers could face is the rise in the prices of cars. US automobile manufacturers ship tens of billions of dollars worth of engines each week. They also ship transmissions and other components from US borders with Canada and Mexico. They will feel the impact of new tariffs.
The new tax also threatens to disrupt the US oil and gas industry, which is highly dependent on Canadian oil. Roughly 60% of the oil that the US imports comes from Canada. Analysts believe oil producers in Canada and Mexico will bear some of the additional costs. US refineries and US consumers will also share these costs.
Electronics, which are the top goods imported from China, could get more expensive. Prices of cellphones, computers, video games could also rise within a couple of months.
Another product likely to be affected is lumber, about 30% of which is imported from Canada. Tariffs on softwood lumber could raise the cost of building houses, which could worsen the housing affordability crisis. Over 70% of the imports for two essential materials come from Canada and Mexico. These materials are softwood lumber and gypsum, which is used for drywall. The National Association of Home Builders confirms home builders rely on these materials. This was quoted by The New York Times.
What Canada, Mexico And China Plan To Do?
Canada has already announced retaliatory tariffs against the US. Canadian Prime Minister Justin Trudeau matched the 25% imposed on his country.
He set out “far-reaching” tariffs. These tariffs would affect 155 billion Canadian dollars’ worth of American goods. The range includes beer and wine, household appliances, and sporting goods. Non-tariff measures being considered are related to critical minerals and procurement, although Trudeau did not offer more detail.
The Canadian Chamber of Commerce said the levies would have “immediate and direct consequences on Canadian and American livelihoods.” They will also “drastically increase the cost of everything for everyone.”
Mexican President Claudia Sheinbaum made a statement. She instructed her economic secretary to put together a response. This response includes both retaliatory tariffs and other measures “in defense of Mexico’s interests”.
China’s Ministry of Foreign Affairs said tariffs are “not constructive.” They will only “undermine” work by both nations to combat narcotics. China “provides support to the US on the issue of fentanyl” but ultimately, “fentanyl is America’s problem,” the ministry said.
How Do The New Tariffs Impact Global Economy?
Trump is using a rarely deployed national security law. It is known as the International Emergency Economic Powers Act. This law is being used to legally justify imposing tariffs on countries that have trade agreements with the US.
According to Tax Foundation estimates, Trump has set in motion tariffs on $1.4 trillion of imported goods. That’s more than triple the $380 billion worth of foreign goods that were hit with tariffs during his first term.
Experts warn that the impact of the tariffs could affect several economies. These include Canada, Mexico, China, and the US itself. Canada’s economy could shrink by 3.6%. According to Cornell University economics professor Wendong Zhang, Mexico could take a 2% hit, as reported by CBS News.
US inflation could rise by as much as 1 percentage point. It may reach as high as 4% on an annual basis. This level is double the Federal Reserve’s goal for a 2% annual rate, Capital Economics told CBS News.
“If the president can, with a stroke of a pen and for no good reason, completely upend a North American supply chain, why would a foreign government invest the political capital needed? Why would they take such a risk? Why would they enter into a trade agreement? This supply chain has been in place for more than 30 years.” Scott Lincicome is the vice president for economics and trade at the Cato Institute. This institute supports free trade. He told The New York Times.
Lincicome further said the cloud of uncertainty over international commerce was beneficial to China. Republicans and Democrats largely view China as an economic adversary.
Fed Chair Jerome Powell and his colleagues might be willing to overlook a one-time hit to prices. However, tariffs could force the US central bank to further delay interest rate cuts.
What About India?
Trump has for now spared India in the trade war. But he had earlier said that India is a “tariff king.” He also remarked, “They’re at the top of their game, and they use it against us.”
The Indian government has been preparing a plan in case Trump levies tariffs on India. Two officials told Livemint that the Indian government is expected to unveil a full-fledged response plan soon. It will depend on the decisions of the US government. The first person mentioned above said, “Inter-ministerial discussions are underway.” They are preparing a list of goods that may attract US tariffs. “Sensitisation of the industry about the same is also underway.”
Meanwhile, Finance Secretary Tuhin Kanta Pandey said it is “premature” for India to say how the US will impose duties. It is also premature to say whether it will happen or not.
New Delhi clearly wants to avoid a trade war with the US. The US is India’s largest trade partner and foremost export market. And this is perhaps why New Delhi has already lowered import taxes on several items. This action could benefit Washington.
The impact of tariffs could be seen in the currency. The Indian Rupee touched a historic low of 87 against the US dollar. Since September, financial markets have started to recognize Trump’s policy stance. The dollar index has risen from 100 to 110. The rupee has fallen from the September 30 peak of 83.8 to 87.16. During the period, forex reserves have dropped from $707.89 billion to $629.56 billion.
The rupee slide could make Indian exports more competitive. There would be a big risk to Indian equity markets as well. Foreign investors have sold Rs 1.78 lakh crore from in Indian equity markets and bought Rs 11,337 crore in Indian debt markets.
For now, India will have to play the wait-and-watch game. However, Trump’s economic gamble is concerning not just for India, but for the world.
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