Trump initiates trade war with Mexico and Canada by applying 25% tariffs

North America ceased to be a free trade zone on Tuesday. U.S. President Donald Trump decided to ignore the treaty he himself negotiated and signed to govern trade relations with his two neighbors, Mexico and Canada. Using fentanyl as a pretext, the United States is imposing tariffs of 25% on imports from these countries, allies and friends, and somewhat lower — 20% — on products from its great geostrategic rival, China. With this, Trump is raising a tariff wall on North American economic integration and opening an era of uncertainty that has been very poorly received by the markets. Warren Buffett, the most prestigious investor in the United States, referred to the tariffs on Monday as “an act of war.” Wall Street suffered its worst session of the year.

The threats from Trump and his team had been so inconsistent and contradictory that the markets did not expect that the 25% tariffs would actually begin to be applied on Tuesday. This explains the earthquake generated by the simple confirmation that what had been announced would be fulfilled. The Nasdaq suffered a 2.6% drop, while the Standard & Poor’s 500 index fell 1.8%. The Canadian dollar and the Mexican peso were quoted lower. The Asian stock markets also opened with strong declines.

The proposed tariffs went into effect at 12:01 a.m. Eastern Time. Customs authorities have published guidelines for the new import taxes. The tariffs are the highest between the United States, Mexico and Canada in many decades. Their entry into force distorts supply chains and will increase the prices of capital goods, raw materials, and industrial and consumer products, including foodstuffs that cross the border. This will put upward pressure on inflation. Hopes for a last-minute agreement have proven in vain and what remains now is to wait and see how long the measures remain in place.

With the tariffs, Washington is hurting its neighbors but it is also shooting itself in the foot. The protectionist measures of the world’s largest economy could cause Mexico and Canada to enter a recession. At the same time, Trump’s mismanagement of trade policy is causing the U.S. economy to lose steam. Inflation expectations have soared, consumer confidence has fallen, the trade deficit has ballooned in the face of accelerating exports, and several indicators point to a weakening economy. The Federal Reserve Bank of Atlanta even predicts a contraction of U.S. GDP in the first quarter of the year.

The trade war is also straining diplomatic relations between the U.S., Mexico and Canada, which have been trying to prevent the tariffs from coming into effect. A one-month postponement was obtained in February after a series of commitments was made, but promises and more far-reaching efforts have not been enough this time to change Trump’s mind, whose decisions seem to be governed by whim and arbitrariness.

That fentanyl is just a pretext was made abundantly clear once again in Trump’s appearance in the Roosevelt Room of the White House on Monday. “What they’ll have to do is build their car plants, frankly, and other things in the United States — in which case, they have no tariffs,” he said. “And I would just say this to people in Canada or Mexico, if they’re going to build car plants, the people that are doing them are much better off building here, because we have the market. We’re the market where they sell the most,” he insisted.

The president also lent a kind of vindictive edge to the measure. “Tariffs are easy, they’re fast, they’re efficient, and they bring fairness,” he said. “It’s going to be very costly for people to take advantage of this country. They can’t come in and steal our money and steal our jobs and take our factories and take our businesses and expect not to be punished, and they’re being punished by tariffs.”

The U.S. president’s treatment of Canada has sparked a surge of patriotic and nationalist sentiment there. Boycotts of U.S. products and retaliatory measures are back on the agenda. Frustration is also rife in Mexico following all kinds of efforts to appease the powerful neighbouring state.

“Canada will not let this unjustified decision go unanswered,” Canadian Prime Minister Justin Trudeau said in a statement on Monday. “Should American tariffs come into effect tonight, Canada will, effective 12:01 a.m. EST tomorrow, respond with 25 per cent tariffs against $155 billion of American goods — starting with tariffs on $30 billion worth of goods immediately, and tariffs on the remaining $125 billion on American products in 21 days’ time. Our tariffs will remain in place until the U.S. trade action is withdrawn, and should U.S. tariffs not cease, we are in active and ongoing discussions with provinces and territories to pursue several non-tariff measures,” he added.

“Because of the tariffs imposed by the U.S., Americans will pay more for groceries, gas, and cars, and potentially lose thousands of jobs. Tariffs will disrupt an incredibly successful trading relationship. They will violate the very trade agreement that was negotiated by President Trump in his last term,” Trudeau stressed.

Mexican President Claudia Sheinbaum woke up on Monday waiting to see what Trump would say. “It is a decision that depends on the government of the United States, on the president of the United States,” she said before Trump’s announcement. “So whatever his decision, we will make our decisions, and there is a plan, there is unity in Mexico,” she added. Late on Monday afternoon she called her closest team together in preparation for the response she will deliver Tuesday at her morning press conference. Until the 11th hour, Sheinbaum has attempted to hold a phone call with Trump, which did not come to pass.

Trade imbalance

The tariffs on Mexico, Canada and China are just the beginning of a full-scale trade war that the United States wants to use to reduce its trade deficit. In 2024, the U.S. bought $3.29 trillion worth of goods from overseas and exported $2.08 trillion. The trade deficit thus stood at $1.212 trillion, a record figure. Of the total merchandise, 41%, or about $1.35 trillion, came from Mexico, Canada and China. These three countries accounted for almost half of the trade imbalance in the world’s largest economy.

Mexico is the United States’ largest supplier, having displaced China in 2023. The country has been able to take advantage of the privileged access to the U.S. market that the USMCA free trade agreement has provided it to date. Imports from its southern neighbor reached an all-time high of $505.851 billion, compared to $475.216 billion in 2023. Although U.S. exports also increased, the trade deficit with Mexico hit a new record of $171.189 billion.

Although China has lost its position as the main supplier, it is still the country with which the United States has the largest trade deficit. The level has decreased compared to the record figures of 2018, when Trump declared a trade war, but it is still very high. The United States imported goods worth $438.947 billion from China last year, but only exported goods worth $143.546 billion to the Asian country, which means the trade deficit stood at $295.402 billion.

With Canada, the trade imbalance is smaller and far from the record of $78.192 billion in 2022. Even so, Trump has repeatedly lashed out at his northern neighbor, dismissing products crossing the border as unnecessary. In 2024, Canada exported goods worth $412.696 billion to the United States, while goods worth $349.360 billion crossed the border in the opposite direction. The trade deficit thus stood at $63.336 billion, 1.5% less than the previous year, according to data from the Bureau of Economic Analysis, part of the Department of Commerce.

Protectionist measures, however, will not be limited to these three countries. Trump has had the European Union in his sights since his first term. He wrongly insists on seeing VAT as a protectionist and discriminatory measure against American products and blames it for the deficit in the exchange of goods (which is largely offset by the balance of services).

The president specifically singled out the EU and VAT when he announced what he called reciprocal tariffs. In theory, they involve taxing other countries with the same tariffs that they levy on American products. In practice, they are left to Trump’s discretion. In fact, before waiting for the calculations, Trump already announced that tariffs on the European Union will be 25%.

The so-called reciprocal tariffs are not just for EU countries, but for the whole world. The U.S. will take into account not only tariff levels, but also non-tariff barriers, including regulatory, monetary, fiscal, or other types of barriers. Commerce Secretary Howard Lutnick has pledged to have the calculations ready by April 1, although Trump prefers to act as of April 2 to avoid doing so on April Fool’s Day. The concept of reciprocal tariffs breaks with the rules of the World Trade Organization and its most-favored-nation clause.

Trump also approved a decree threatening countries that have a Google tax (including Spain) with trade and tax reprisals. He even floated the threat of unspecified tariffs on the European Union (and also the United Kingdom) if they require social media to adopt content moderation policies that combat disinformation and hate speech.

Sectoral tariffs

Trump has approved widespread tariffs of 25% on aluminum and steel, which are set to take effect on March 12. The president has hinted that these tariffs would be superimposed on those corresponding to each country. Thus, for example, Mexican steel and aluminum would hypothetically be subject to a 50% tariff. For copper and its derivatives, Trump has ordered an investigation to study whether to also impose tariffs. On Saturday, he also ordered the Department of Commerce to investigate the damage to national security posed by lumber imports, laying the legal groundwork for new tariffs, which appear to be aimed at Canada.

Trump’s magic tariff figure is 25%. He has also threatened such import taxes on cars, semiconductors, and pharmaceuticals. It is not clear when they will take effect, whether they include exceptions, or whether they overlap with other geographic tariffs, such as reciprocal tariffs or those planned for Mexico and Canada.

On Monday, Trump announced that he would impose unquantified tariffs on food products starting April 2. But in reality, most U.S. food imports come from Mexico and Canada. Will the two tariffs overlap? It is unclear. In fact, the way the message is written, it could even be interpreted as tariffs on exports: “To the Great Farmers of the United States: Get ready to start making a lot of agricultural product to be sold INSIDE of the United States. Tariffs will go on external product on April 2nd. Have fun!” Trump wrote on Truth Social.

The president announced a few weeks ago from the Oval Office that he would approve tariffs on oil and gas on February 18, one of those dates that he occasionally launches in a somewhat arbitrary manner without it being clear what the reason is. February 18 arrived and nothing happened. Trump has barely spoken about tariffs on oil and gas again.

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