Author: Davit Shatakishvili
On February 1, President of the United States Donald Trump signed an executive order imposing a 10% tariff on imports from China and a 25% tariff on goods from Canada and Mexico, set to take effect on February 4 (then, following further negotiations with the leaders of Mexico and Canada, he suspended their tariffs for one month). Trump’s actions sparked criticism and prompted retaliatory tariff measures from all three countries. Trump justified the tariff hikes by citing rising immigration, fentanyl smuggling, and the U.S. trade deficit. He also warned the countries of the European Union to expect potential similar tariffs. According to Trump, the European Union restricts imports of American agricultural products, automobiles, and energy resources, contributing to a significant trade deficit. As of 2023, this deficit stands at 158 billion Euros. It is interesting to examine the positions of each party, the potential impact of these tariffs on the U.S. economy, and possible scenarios for how events may unfold.
Party Stances
During a press briefing in the Oval Office, Donald Trump explained his reasons for imposing tariffs on Mexico, Canada, and China: “Number one is the people that have poured into our country, so horribly and so much … number two are the drugs: fentanyl and everything else that has come into the country … and number three are the massive subsidies we’re giving to Canada and Mexico over deficits.” According to a senior adviser from Trump’s pre-election campaign, these tariffs do not signify a trade war, but rather “the threat of a negotiation.”
Canadian Prime Minister Justin Trudeau stated that the actions of the White House have caused a rift between Canada and the United States, rather than fostering unity. He mentioned that Canada would respond by imposing 25% tariffs on up to $155 billion worth of U.S. imports, including alcohol and fruit. Trudeau expressed that the Canadian people feel betrayed, and reminded Americans that Canadian troops fought alongside them in Afghanistan, and responded swiftly to various crises, such as the California wildfires and Hurricane Katrina.
Claudia Sheinbaum, the President of Mexico, stated that they categorically reject the White House’s accusations that the Mexican government has ties to criminal organizations. She argued that if the U.S. government and its agencies were serious about combating fentanyl use in their country, they would tackle the drug trade on the streets of their own major cities. She criticized them for not addressing the money laundering linked to this illicit trade, which has caused significant harm to its population.
On February 3, following talks with Trudeau and Sheinbaum, Donald Trump suspended the tariffs imposed on Canada and Mexico for one month, but went ahead with the tariffs on China. Canada’s Prime Minister unveiled a 1.3 billion USD plan to Trump aimed at tightening controls on the Canada-U.S. border to reduce the flow of fentanyl, while the Mexican president promised Trump she will deploy 10,000 troops to the Mexico-U.S. border to strengthen border control, reduce drug trafficking, and curb the flow of illegal migrants.
China’s Foreign Ministry stated that the government strongly condemns and opposes the White House’s actions and will take necessary countermeasures to protect its legitimate rights. China imposed a 15% tariff on imported liquefied natural gas and coal, along with a 10% tariff on crude oil from the United States. Additionally, the import of American cars will now face an extra 10% tariff. In addition, China plans to file a complaint with the World Trade Organization regarding the additional U.S. tariffs. According to their statement, China began regulating fentanyl-related drugs as controlled substances in 2019, and has actively collaborated with the United States in the fight against drugs.
In addition to Mexico, Canada, and China, Trump announced on February 1 that the European Union could face tariffs in the coming months unless it agrees to purchase American oil and natural gas. According to Trump, the European Union should address its significant deficit by purchasing large quantities of oil and gas from the United States. According to the U.S. Census Bureau, in 2023, the European Union exported goods worth 502 billion Euros to the United States, accounting for nearly 20% of its total exports, making the U.S. the EU’s second-largest trading partner. As of 2023, U.S. exports to Europe totaled 344 billion Euros, while the U.S. trade deficit with the European Union amounted to 158 billion Euros.
Donald Trump imposed the tariffs under the ‘International Emergency Economic Power Act.’ It’s a nearly 50-year-old law that gives the president the power to impose sanctions after declaring a state of emergency. The president has the authority to impose tariffs without congressional approval in cases related to national security, safeguarding U.S. manufacturing, or addressing a national emergency. This broad scope of reasons makes challenging tariffs in court particularly complex.
Potential Economic Impact of Tariffs
Some economists argue that Trump’s actions heighten the risks of damaging the country’s economic growth and drive inflation. According to their analyses, the 25% tariffs on Mexico and Canada, along with the 10% tariff on Chinese goods, could result in a 1.5% reduction in U.S. economic output by 2025 and a 2.1% decline by 2026. The U.S. economy, particularly the manufacturing sector, relies significantly on imports from Mexico, Canada, and China, including essential goods such as auto parts, electronics, and raw materials. Higher tariffs will raise production costs, leading to more expensive goods and shrinking profit margins for businesses. Meanwhile, retaliatory tariffs from these countries further escalate risks for American companies reliant on foreign demand, for example, sectors such as agriculture, automotive, and technology could be undermined, potentially eroding the U.S.’s global competitiveness. It is also important to note that shortly after the announcement of the tariffs, gas and oil prices surged on the stock exchanges. According to Goldman Sachs’ latest forecast, the price of Brent oil is expected to rise to 78 USD this year and fall to 73 USD in 2026, compared to their previous forecast of 76 USD and 71 USD, respectively.
Their estimates suggest that inflation in the U.S. will rise by 0.7% in the first quarter of this year and increase by an average of 0.4% annually, relative to what it would have been in the absence of Trump’s new tariffs. Rising inflation compels the Federal Reserve to keep the refinancing rate elevated, which in turn slows economic growth. Widespread uncertainty and inflationary expectations further undermine financial markets and the broader economy. Economists argue that President Trump’s push for the Federal Reserve to cut the refinancing rate and set new tariffs is contradictory. Furthermore, this approach undermines his campaign promises to curb inflation and strengthen the middle class.
During Donald Trump’s first term as president, in retaliation to U.S. tariffs on China, Beijing imposed tariffs on American imports, including soybeans, beans, and corn. This had a severe impact on U.S. farmers, many of whom relied heavily on exports to China. In response, Trump provided subsidies to farmers, whose export revenues were reduced by at least 10 billion USD due to the tariffs.
Supporters of Trump, however, view the decision to impose tariffs as a bold and necessary move to reverse decades of ineffective trade policies and to revitalize America’s manufacturing and agricultural sectors. Donald Trump believes that the tariffs will not lead to an increase in prices. According to him: “Tariffs don’t cause inflation, they cause success… so we are going to have great success. There could be some temporary short-term disruption, but people will understand that…”. Under the tariffs, one potential benefit for the U.S. economy could be the strengthening of local production due to the higher cost of imports, along with an increased demand for domestically produced goods. Additionally, in the long term, tariffs could encourage domestic investment and innovation, boost R&D spending by companies, stabilize supply chains, and help reduce trade deficits.
***
The President of the United States, Donald Trump, began his new presidential term with a decisive move, one which he claims aligns with his campaign promises to implement an “America First” policy, to significantly limit immigration, boost U.S. trade capacity, protect domestic production, stabilize consumer prices, and reduce the trade deficit. Trump believes that imposing tariffs will make the American people wealthier and that local manufacturing will be boosted. However, he is likely aware that in the short to medium term, the effects of tariffs could lead to higher prices and slower economic growth, particularly due to the expected increase in the refinancing rate. However, based on Trump’s negotiating tactics, there is also a view that he will use tariffs in the short term as leverage to force solutions to existing issues with countries he has grievances against. Thus, it is difficult to predict his next moves at this stage, as they will likely depend on the fulfillment of promises made to Trump by the leaders of Canada and Mexico in the coming month, as well as the outcomes of a potential meeting between Trump and Chinese authorities.
