Canada retaliated with staggered levies on US$107 billion worth of US products, while China imposed tariffs of up to 15%.
President Donald Trump followed through on his threat to impose tariffs on imports from trading partners Canada and Mexico and doubled an existing tariff against China, prompting swift retaliation from some of the affected countries, which is fueling a trade war that could strain the global economy.
The new US tariffs (25% tariffs on most Canadian and Mexican imports and an increase in the charge on China to 20%) apply to approximately US$1.5 trillion in annual imports, an expansive measure that signals to markets that the Republican president is committed to inflicting economic pain to generate new revenue and create domestic manufacturing jobs.
Canada responded with gradual tariffs on US$107 billion worth of US products, while China imposed tariffs of up to 15%, mainly on US agricultural shipments. Mexican President Claudia Sheinbaum said on Tuesday that her government would announce tariffs and other measures on Sunday in response to Trump's new accusations. She said she would likely speak with Trump on Thursday.
The measures, which were taken ahead of Trump's speech to Congress on Tuesday to outline his priorities for his second term, mark a new phase in the process of expanding Trump's economic and diplomatic policy of reestablishing the United States' place in the world.
The confirmation of the tariffs dispels doubts that the US president will actually follow through on his repeated threats to disrupt global economic ties to counter what he describes as unbalanced trade.
US stocks fell at the opening of markets on Tuesday morning in New York. The S&P 500 fell 0.8%. The Nasdaq 100 lost 0.7%. The Dow Jones Industrial Average fell 0.8%.
“We are in a new era where the mantra is to protect markets, and the US is leading the way on this,” said Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis. ”China retaliated by targeting Trump's most loyal voters in the agricultural sector. But that won't stop him.”
Treasury Secretary Scott Bessent downplayed the market sell-off on Tuesday.
“In the medium term, which is what we're focused on, we're going to focus on the everyday citizen. Wall Street has done great and can continue to do great, but we're going to focus on small businesses and consumers,” Bessent said on Fox News.
According to the Yale Budget Lab, the tariffs raise U.S. import taxes to their highest average level since 1943. That would mean additional costs of up to $2,000 for U.S. households. It would also mean significantly slower economic growth in the United States, especially if other countries retaliate, according to a report released Monday.
“The lesson from the first few weeks of Trump's presidency is that these things can change depending on the concessions countries are willing to make,” Maeva Cousin and Rana Sajedi of Bloomberg Economics wrote in a research note on Tuesday. ‘But if they endure, the impact will be significant.’
And there are more tariffs on the way...
Trump has indicated that more tariffs will be imposed, including reciprocal tariffs in April on all US trading partners that have their own levies or other barriers to US products, as well as 25% sectoral taxes on automobiles, semiconductors, and pharmaceuticals. Those tariffs are also intended to be cumulative, on top of any general tariff on a particular country.
Trump has also said he is working on a 25% tariff for the European Union and is investigating levies on imports of copper and wood. Tariffs on steel and aluminum will also take effect on March 12, further affecting Canada and Mexico.
European Commission spokesman Olof Gill said in an emailed statement that the US decision threatens to disrupt global trade, harm economic partners and create uncertainty. “These tariffs threaten deeply integrated supply chains, investment flows and economic stability on both sides of the Atlantic.”
In the run-up to the deadline, US stocks suffered their biggest drop of the year, while Treasury yields fell earlier to their lowest level in four months and oil fell to a three-month low.
The Canadian government's first stage of retaliation was to impose 25% tariffs on goods from US exporters worth approximately C$30 billion (US$20.6 billion), which would take effect at the same time as the US tariffs.
A second round will be applied in three weeks with the same rate on products worth C$125 billion, a list that will include high-value items such as cars, trucks, steel, and aluminum.
“Canada will not let this unjustified decision go unanswered,” Prime Minister Justin Trudeau said in a statement. The retaliation plan is the same one he announced in February after Trump signed his broad tariff executive order.
However, Commerce Secretary Howard Lutnick said Tuesday that more tariffs will be imposed on Canada, and he opposed tariffs on the country's dairy products, as well as its national sales tax and integrated auto supply chains. Those factors will be taken into account when the Trump administration calculates its reciprocal charges on the US's northern neighbor.
“He will talk about all those products in Canada,” Lutnick said on CNBC. ‘The idea is to restart, but that will begin on April 2.’
Later on Tuesday, Trump reiterated his criticism of restrictions on US banks doing business in Canada, another sign that he is unwilling to back down.
The 25% tariffs that will take effect will apply to all imports from Canada and Mexico, with the exception of Canadian energy, which will be taxed at a rate of 10%. Trump's tariffs on Canada and Mexico will have particularly harsh consequences for the automotive sector, an industry with supply chains that span all three countries.
However, the Trump administration delayed the elimination of the so-called “de minimis” exemption for low-cost goods until a plan is developed to collect revenue on those imports. That means that, for now, Canadians and Mexicans can continue to send low-cost goods across the border without tariffs.
Trump initially announced tariffs on North American neighbors and China in February, with the intention of punishing them for what he called a failure to block the flow of undocumented immigrants and illegal drugs, such as fentanyl, across U.S. borders. But while a 10% tax on Chinese imports took effect last month, Trump delayed taxes on imports from Canada and Mexico until March 4, giving them time to negotiate a postponement. That respite did not last.
“The failure of both nations to arrest traffickers, seize drugs, or coordinate with US law enforcement constitutes an unusual and extraordinary threat to the security of the United States,” the White House said in a fact sheet when the tariffs took effect.
This leaves the fate of a trade agreement that Trump negotiated with Canada and Mexico during his first term uncertain and risks further straining the US economy and reigniting inflation that is still simmering.
In response, China imposed tariffs of up to 15% on US products and banned exports to some defense companies in retaliation for the Trump administration's new tax. Soybeans, beef, and fruits are among the products facing a 10% tariff, according to an announcement by the Ministry of Finance.
“For now, the measures remain relatively restrained,” said Lynn Song, chief economist for mainland China at ING Bank. ‘This retaliation shows that China remains patient and has refrained from ’turning the tables,' so to speak, despite the recent escalation.”
China also halted imports of logs from the US on Tuesday after pests were detected in US imports, according to a statement, in addition to blocking soybeans from three US companies, according to a separate statement.
Trump has expressed a desire to speak with Chinese leader Xi Jinping, but the two have yet to speak a month after the US president raised the possibility of a call to negotiate a deal.
The new tariffs are a risky gamble for a president elected in part on dissatisfaction with his predecessor's handling of the economy, amid polls showing voters want Trump to do more to counter inflation.
Trump has dismissed economists' warnings that the tariffs threaten to fuel price growth and will fail to generate the revenue the president and his allies have predicted, as they seek to calm concerns about the cost of a trillion-dollar tax cut package in Congress.
Kate Sullivan - Josh Wingrove, Bloomberg