How Trump's New Tariffs On Canada, China, Mexico Can Upend Global Economy, Impact On India Explained
Canada's economy could shrink by 3.6%, while Mexico could take a 2% hit due to Trump’s tariffs. India, which has currently been spared, 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 in response to his concerns about illegal immigration and drug trafficking – the two promises on which he was elected.
Trump signed an executive order on Saturday that imposes 25% tariffs on imports from Canada and Mexico, while adding an additional 10% levy on goods from China.
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Canada and Mexico said they will respond with retaliatory tariffs, while China said it would “take corresponding countermeasures 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 represents a reversal of virtually duty-free trade among the three North American nations that has existed for several years.
The tariffs will have no exemptions, and the executive action by Trump will close the so-called de minimis loophole that had allowed shipments of $800 or less to come into the US tax-free — a key provision used by many American small businesses but also 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", but insisted his vision for the country “will all be worth the price that must be paid".
Trading data and economic studies suggest that US consumers will may have to shell out on wide range of products, from vegetables and meat to cellphones and cars. While some companies may choose to pass on the cost of the tariff, many are likely to raise prices on their products.
For instance, fresh produce such as avocadoes, tomatoes and strawberries from Mexico could see an uptick in prices, 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 consisted of vegetables, fruit, beverages and distilled spirits, according to the US Department of Agriculture.
Since the US imports a range of agricultural products from Canada, including meats and grains, 25% tariffs on neighbour could mean rise in the prices of beef, maple syrup.
Data from the Labor Department showed that grocery prices — which were relatively flat in late 2023 and early 2024 — in December rose again, 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. Since US automobile manufacturers ship tens of billions of dollars worth of engines, transmissions and other components each week 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 expect the additional costs to be borne by a combination of oil producers in Canada and Mexico, US refineries and US consumers.
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. More than 70% the imports of two essential materials that home builders rely on — softwood lumber and gypsum, which is used for drywall — come from Canada and Mexico, according to the National Association of Home Builders, as quoted by The New York Times.
What Canada, Mexico And China Plan To Do?
Canada has already announced retaliatory tariffs against the US, with Canadian Prime Minister Justin Trudeau matching the 25% imposed on his country.
He set out “far-reaching" tariffs would affect 155 billion Canadian dollars’ worth of American goods ranging from beer and wine, to 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" and will “drastically increase the cost of everything for everyone".
Mexican President Claudia Sheinbaum said in a statement that she instructed her economic secretary to put together a response that included both retaliatory tariffs and other measures “in defense of Mexico’s interests".
China’s Ministry of Foreign Affairs said tariffs are “not constructive" and 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, known as the International Emergency Economic Powers Act, 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 the economies of Canada, Mexico and China, as well as the US itself. Canada’s economy could shrink by 3.6%, while Mexico could take a 2% hit, according to Cornell University economics professor Wendong Zhang, as reported by CBS News.
US inflation could rise by as much as 1 percentage point, pushing it as high as 4% on an annual basis, or double the Federal Reserve’s goal for a 2% annual rate, Capital Economics told CBS News.
“If the president can with the stroke of a pen and for no good reason completely upend a North American supply chain that has been in place for more than 30 years, why would a foreign government be willing to expend all the political capital needed to enter into a trade agreement?" Scott Lincicome, the vice president for economics and trade at the Cato Institute, which supports free trade, told The New York Times.
Lincicome further said the cloud of uncertainty that the US was casting over international commerce only stood to benefit China, which Republicans and Democrats largely view as an economic adversary.
Although Fed Chair Jerome Powell and his colleagues might be willing to overlook a one-time hit to prices, 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", and “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 in the coming months depending on the decisions of the US government. “Inter-ministerial discussions are underway to prepare a list of goods that may attract US tariffs," said the first person mentioned above. “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 or whether it will happen or not.
It is clear that New Delhi wants to avoid a trade war with the US, as it is India’s largest trade partner and foremost export market. And it’s perhaps because of this that New Delhi has already lowered import taxes on several items, which could benefit Washington.
But the impact of tariffs could be seen in the currency, with the Indian Rupee touching a historic low of 87 against the US dollar. Since Trump’s policy stance started to be recognised in financial markets in September, 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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