Department of Research, Strategic Studies and International Relations 05-02-2025

Canada, Mexico, and China play a significant role in U.S. trade, collectively accounting for over 40% of the country’s total goods exchange.

Recently, the U.S. decided to delay its planned 25% tariffs on imports from Canada and Mexico by a month. This decision followed urgent discussions between President Donald Trump and the leaders of both nations on Monday.

Canadian Prime Minister Justin Trudeau and Mexican President Claudia Sheinbaum agreed to strengthen border security measures to curb the movement of illicit drugs and unauthorized migrants into the U.S., thereby preventing an immediate trade conflict. However, on Tuesday, the U.S. proceeded with implementing a 10% tariff on Chinese imports, prompting retaliatory measures from Beijing. These new tariffs build on those first introduced during Trump’s presidency from 2017 to 2021.

As the world’s second-largest trading nation—following China—the U.S.’s tariff policies have created ripples across global markets. From January to November 2024, U.S. trade with the world amounted to $4.88 trillion, including $2.98 trillion in exports and $1.90 trillion in imports. Given that trade with Mexico, Canada, and China exceeds $2 trillion, these policies could have far-reaching economic consequences.

Understanding Tariffs and Their Impact

A tariff is a tax imposed by a government on imported goods and services. It is paid by businesses importing products into the country and is typically intended to protect domestic industries by making foreign goods more expensive, which can reduce consumer demand.

For instance:

A Chinese manufacturer sells jeans to a U.S. importer for $10.

The U.S. government applies a 10% tariff on Chinese imports.

The importer must now pay an additional $1 in tax, raising the cost to $11.

After factoring in expenses and profit margins, the jeans may retail for $20.

Ultimately, the U.S. consumer bears the increased cost.

The Significance of the Tariff Pause for Canada and Mexico

Following negotiations with Trump, both Canada and Mexico pledged to enhance border security.

“I just had a great conversation with President Claudia Sheinbaum of Mexico. She agreed to immediately deploy 10,000 Mexican soldiers along the border with the United States,” Trump announced on Truth Social.

After his conversation with Trump, Trudeau confirmed that Canada would proceed with its previously planned $1.3 billion border security initiative. Additionally, he pledged to appoint a “fentanyl czar” and designate drug cartels as terrorist organizations.

According to Vina Nadjibulla, Vice President of Research and Strategy at the Asia Pacific Foundation of Canada, while the pause on tariffs is positive, Canada must take further steps to reduce its dependence on U.S. trade and enhance its competitiveness globally.

Are Tariffs a New Strategy?

No, tariffs have long been used as an economic tool. In the U.S., tariffs were a major revenue source from 1790 to 1860, contributing 90% of federal income during that period.

Tariffs can also serve as a punitive measure against foreign countries for violating trade agreements. In 2018, the U.S. imposed sweeping tariffs on Chinese goods, citing unfair trade practices and intellectual property theft. This move sparked a U.S.-China trade dispute, leading to tariffs on products such as semiconductors, batteries, and home appliances.

That same year, Trump imposed a 25% tariff on steel and a 10% tariff on aluminum, affecting trade with Canada, Mexico, India, Brazil, and Argentina.

What Products Will Be Impacted?

A variety of goods imported from Canada, Mexico, and China will likely be affected, including:

Automobiles

Fuel

Computers and electronic equipment

Food products such as avocados

Breakdown of the Tariffs on Canada, Mexico, and China

Trump signed executive orders imposing the following tariffs:

25% on all Canadian and Mexican goods

10% on Canadian oil

10% on Chinese imports

Canada, which exports 97% of its crude oil to the U.S., is particularly affected. Mexico, a key supplier of fruits, vegetables, and auto parts, will also face economic impacts. Meanwhile, China—one of the largest exporters of electronic goods such as chips, laptops, and smartphones—continues to bear the brunt of U.S. trade restrictions.

Will These Tariffs Cause Inflation?

“Yes,” Nadjibulla stated. “Both the tariffs themselves and the measures to mitigate their effects—such as subsidies and industry support programs—will drive inflation.”

Higher costs for goods, combined with government efforts to offset economic fallout, are expected to contribute to overall price increases.

Will Prices for Other Goods Rise?

Yes. The price increases will not be limited to finished consumer products but will also affect capital goods—items businesses use for production. Rising costs for raw materials and components will likely lead to higher overall prices throughout the supply chain.