President-elect Donald Trump announced plans to impose significant tariffs on products from Mexico, Canada and China shortly after taking office on January 20th. Citing concerns about illegal immigration and the fentanyl crisis, President Trump pledged to impose a 25% tariff on all imports from Mexico and Canada and an additional 10% tariff on Chinese goods. Tensions have escalated with some of the United States’ largest trading partners.

In a series of posts on Truth Social, President Trump said, “On January 20th, one of the first of many executive orders I issued was to require all products imported into the United States to be shipped to Mexico and Canada. Sign all the necessary documents to impose a 25% tariff. And that ridiculous open border. This tariff will be in effect until drugs, especially fentanyl, and all illegal aliens are stopped from entering our country. .”

President Trump added that the 10% tariffs on China are in response to the country’s failure to curb the influx of fentanyl precursor chemicals that he says are facilitating drug production in Mexico.

While President Trump’s rhetoric has been characterized as a negotiating tactic, businesses and governments alike are wary of the potential economic impact.

What is a customs duty and how does it work?

Tariffs are basically taxes imposed by the government on imported goods. These charges are typically calculated as a percentage of the value of the imported goods and are paid by the importing party, such as a company or distributor, and the increase is usually passed on to the consumer.

The main purpose of tariffs is to make imported goods more expensive and encourage consumers and businesses to buy domestically produced products instead. Governments use tariffs to protect domestic industries from foreign competition, increase profits, or achieve specific policy goals such as penalizing trading partners for practices they deem unfair. may be used.

However, tariffs often trigger retaliatory measures from affected trading partners, which impose their own tariffs on exports from the originating country. This cycle could turn into a trade war.

backlash

The Chinese embassy in Washington quickly reacted to President Trump’s comments, warning that a trade war would hurt both countries. Press Secretary Liu Pengyu said, “China-US economic and trade cooperation is essentially mutually beneficial. No one wins in a trade war or a tariff war.” It added that it had taken concrete steps to combat this.

Canada and Mexico have avoided direct mention of tariffs, but have emphasized continued cooperation with the United States on border security and drug enforcement.

Together, Canada and Mexico account for about 34% of U.S. exports and 30% of U.S. imports.

China accounts for approximately 15% of imports and 7.5% of exports.

economic impact

President Trump’s announcement has already roiled financial markets, with the Australian dollar hitting a seven-month low (currently at US$64.89 at the time of writing) and the ASX200 index closing 0.69% lower.

Economists have warned that the proposed tariffs could raise prices for U.S. consumers and disrupt supply chains. A report from the Peterson Institute for International Economics estimates that the tariffs could cost American households an average of $2,600 a year.

United States-Mexico-Canada Agreement

The proposed tariffs have created uncertainty over the future of the United States-Mexico-Canada Agreement (USMCA), a trade deal that President Trump himself negotiated during his first term.

Critics say unilateral tariff increases are likely to violate the agreement because tariffs on products originating from countries that are party to the agreement can only be increased in exceptional or justified circumstances.

However, the enforcement mechanism is somewhat lackluster. The agreement does not have direct penalties and cannot be enforced, but it does provide for enforcement measures such as tariff-based retaliation and suspension of benefits. In the long run, the United States will lose credibility in adhering to future trade agreements.

Mexico’s former ambassador to the United States, Arturo Zarkán, suggested the tariffs could lead to a renegotiation of the deal.

What happened last time?

During the first Trump administration, tariffs were a key element of the “America First” economic policy. In January 2018, the administration imposed tariffs of 30% to 50% on solar panels and washing machines, targeting imports from countries such as China and South Korea. Additional tariffs of 25% on steel and 10% on aluminum were introduced in March 2018 and initially applied to most countries, including China, Russia and Japan. In June 2018, these steel and aluminum tariffs were extended to Canada, Mexico, and the European Union after previous temporary exemptions for these trading partners expired.

The administration specifically targeted China, and tariffs escalated in both scope and intensity, ultimately sparking a trade war. By the end of 2019, approximately $360 billion worth of Chinese imports were subject to tariffs, including consumer products such as electronics, clothing, and household goods.

These measures were justified as a means to reduce the trade deficit, protect domestic industry, and address intellectual property issues. But trading partners including Canada, China and the European Union have imposed retaliatory tariffs on U.S. goods, targeting politically sensitive industries such as agriculture and manufacturing, often in key Republican constituencies.

The impact of the tariffs was widely criticized by economists as having a negative impact on the economy. According to the survey, U.S. consumers are facing price increases, with intermediate goods increasing by 10% to 30% and washing machines increasing by 12%. The tariffs reduced total real income by $1.4 billion per month and increased consumers’ tax burden by $3.2 billion per month. Job losses were significant, with 75,000 fewer manufacturing jobs due to the steel tariffs and overall employment in the affected sectors. The retaliatory tariffs caused a 9.9% decline in U.S. exports of targeted products, particularly agricultural products. The Congressional Budget Office estimated that GDP in 2020 would decline by 0.5% and average real household income would decline by US$1,277.

What tariffs are currently imposed on China?

Measures implemented during the Trump administration continued under President Biden. These tariffs, known as “Section 301 tariffs” because they are imposed under the provisions of the Trade Act of 1974, have undergone various adjustments and reviews. The system currently applies to US$300 billion worth of Chinese imports, with tax rates varying from 7.5% to 25% for each product category.

In September, the Biden administration finalized increased tariffs on some Chinese products, including a 100% tariff on electric vehicles, a 25% tariff on lithium-ion EV batteries, and a 50% tariff on solar cells.