By launching presidential tariffs without clear rationale for imports from Canada, Mexico and China, President Trump created one of the presidency's biggest gambling, causing a trade war that risked damaging the US economy.
His actions have overthrew diplomatic relations with America's biggest trading partners, defeated the market and caused retaliation on American products. Businesses, investors and economists have been confused as to why Trump creates such a tumultuous situation without long negotiations or clear reasoning.
Trump has provided various explanations about tariffs and said it is a punishment for other countries for failing to stop drugs and immigration from flowing to the United States. On Tuesday, he cited hostility towards American banks in Canada as another reason.
Canadian Prime Minister Justin Trudeau said it would be difficult to understand Trump's rationale for tariffs, but assumed that his intention was to cripple Canada. “What he wants is to see a complete collapse of the Canadian economy because it makes it easier to annex us,” Trudeau said at a press conference Tuesday. “It never happens. We will never become the 51st state.”
Commerce Secretary Howard Lutnick said Tuesday afternoon that the president may reach some kind of accommodation in Canada and Mexico, which could be announced on Wednesday. “He understands, you'll do more, and I'll see you in some way,” Rutnick said.
Canada has announced a series of retaliatory tariffs on US imports worth $20.5 billion, with Trudeau saying other “non-tariff” measures approaching.
“Yeah, he can damage the Canadian economy, but he will discover it quickly because American families discover it quickly, that will hurt people on both sides of the border,” Trudeau said.
Stock markets around the world have collapsed. In the US, the financial sector was one of the worst hits along with many companies, including cruise lines and large tech companies. The S&P 500 fell by 2% before moderated the loss in the afternoon. The dip added to the 1.8% loss on Monday. This was the sharpest decline this year.
The bet that Trump appears to be making is that America is so economically strong and critical of international commerce that it can embrace tariffs to solve almost any problem. But Trump's mercantalism and bullying tactics risks destabilizing the US economy, which has now been hit by three years of inflation and is now facing slowing growth.
The president is imposing a sudden import tax on America's biggest trading partner at a moment when inflation is still out of full control. Many economists say it will further raise the costs for American households and hinder economic growth.
“Americans are relying on President Trump to cut costs and expand the US economy,” said Michael Hanson, senior vice president of spokesperson for the Association of Retail Leaders. “Taxes in Canada and Mexico have gone back to serious risks of these targets and risking the North American economy becoming unstable.”
The unsettled business group held an emergency meeting on Tuesday to decide on responses to trade moves. This imposed a 25% tariff on Canadian and Mexican products, and an additional 10% tariff on previous Chinese taxes. Some groups were considering taking legal action to challenge national security authorities that the Trump administration is calling for tariffs to be enacted.
Others were trying to tackle what they meant for their bottom line. Retailer Target warned Tuesday that tariffs could undermine efforts to recover from the harsh 2024. Consumers said they could pull back spend amid wider uncertainty about the economy and could raise prices for some products as early as this week. Corie Barry, CEO of Best Buy, said during the conference call that price increases were “very likely,” but it's hard to say how big they'll be.
Cathy Boss Jansick, the nation's chief economist, estimated that if tariffs were maintained and retaliation continued, economic growth would otherwise be perfectly lower than before. This suggests that the US economy will only increase by 1% in 2025. It increased by 2.5% in 2024.
Bostjancic also estimated that tariffs could encourage price increases for everyday items, which cost on average $1,000 a year.
Several businesses and unions benefiting from the tariffs praised them. The United Autoworker Union said: “I'm happy to see the US president take positive action to end the free trade disaster that fell like a working class bomb.”
And Trump showed no signs of backdown Tuesday. The company said that if it builds a factory in the US, it could simply avoid tariffs.
“If businesses move to the US, there will be no tariffs!!” Trump wrote on Tuesday about the true society.
Hours later, Trump warned that if Canada retaliates with its own tariffs, the US would increase “mutual” tariffs at the same amount.
Trump's top economic aide tried to explain the decision on Tuesday. Lutnick told CNBC that tariffs were “not a trade war” and instead called the conflict the “war on drugs.”
If Canada and Mexico can prove to the president that they can stop the flow of fentanyl, “Of course the president can remove these tariffs,” the Commerce Secretary said. However, he said the US had not seen a “statistically related decline in American deaths.”
Official statistics show that overdose deaths in the US fell sharply in the 12 months that ended in September, with a sharp drop in intersections at the US-Mexico border.
Lutnick said the president will take other trade-related actions against Canada and Mexico in April. “Canada and Mexico had an incredible economy, an invitation to do business with the United States. They abused that invitation,” Rutnick said.
Everett Eisenstad, a partner at Squire Patton Boggs and former Trump economic adviser, said the president appears to be unhappy with the progress of other countries in the fight against drug trafficking, but there may be other purposes.
“I think it's about fentanyl, but it's also about the broader picture,” he said.
Trudeau, along with Mexican President Claudia Sinbaum, implied that the administration is creating false pretexts for tariffs.
After ticking over Mexico's recent list of success in cracking down on drug trafficking, Sinbaum rejected what she called the “fentanyl argument,” which she called by Trump to justify the imposition of tariffs.
“For humanitarian reasons, we will work together to prevent illegal trafficking of drugs to the United States,” she said in a statement. “But as we have stated on many occasions, the government of that country must also be held accountable for the opioid crisis that caused so many deaths in the United States.”
Trudeau called Trump's rationale “completely fake, completely unfair, completely false.”
One of Trump's main goals for tariffs is to force more domestic production. He also views the trade deficit as a US “subsidy” to other countries, and believes tariffs will offset the costs of tax cuts and help repay $36 trillion in national debt.
Tariffs may encourage some companies to open factories in the US to serve American customers. However, Canada, Mexico and China also announced plans to retaliate against US exports, bumping into a wide range of American sectors, including agriculture, retail and automobiles.
The economic impact of tariffs depends heavily on how global trade changes to explain increased costs and how consumers adapt. Economists at Pantheon macroeconomics predict that these tariffs will lead to a decline in the share of US imports from Mexico, citing the shift in trade to Vietnam and Mexico during Trump's trade war during Trump's first administration, leading to a 2% point decline. They also expect the US to see imports from Canada fall to 10%.
Federal Reserve Bank of New York Chairman John C. Williams warned Tuesday that tariffs are likely to lead to rising US prices, but the size is highly uncertain.
Speaking at an event hosted by Bloomberg, he said he is beginning to take into account the impact of tariffs on inflation.
Williams stressed that the Fed is paying close attention to how tariffs affect economic activity, such as when businesses continue to invest or consumers continue to spend. “That's what I think is another big uncertainty,” he said.
Trump is likely to be correct in his calculations that tariffs will hurt American trading partners more than the US. The United States is a very large country with diverse resources and is less dependent on trade than many other developed economies. Tariffs could bolster the US dollar, the global reserve currency, making imports appear cheaper and dull some of the tax impact.
Trade in goods and services accounts for about a quarter of US economic activity, compared with about 70% in Mexico and Canada and 37% in China. Canada and Mexico both send about 80% of their exports to the US, and are highly dependent on the US.
Foreign governments have already responded to Trump's tariff threats by quietly working to diversify trade ties in search of non-US partners. Mexico renewed its trade agreement with the European Union and made progress in trade talks with Brazil. Europe has reached a separate agreement between South American countries and Switzerland.
Still, the negative impact of tariffs may be inevitable, especially for Canada and Mexico. An analysis by the Peterson Institute for International Economics in February shows that the 25% tariff on all US imports from Canada and Mexico is consistent with similar tariffs from these countries, indicating that the US economy will shrink in the coming years, despite the greater shrinking of the Canadian and Mexican economies.
The tariffs drew quick criticism from Congressional Democrats, but Republicans were nervous to protect them.
Sen. John Tune, a South Dakota Republican and majority leader, said Trump's tariffs “in this case it caters to a specific purpose to reduce the amount of fentanyl coming to this country across the border.” And I think these tariffs are hopefully temporary. ”
“Hopefully, when it's all said and done, it won't cause a lot of confusion,” he said.
Sen. Ted Cruz, a Texas Republican, also said he hopes tariffs will not last for a long time.
“Texas has a huge amount of trade with both Mexico and Canada,” Cruz said. “So these tariffs serve as an incentive for President Trump to say they are designed to be.”
Colby Smith, Joe Rennison and Catie Edmondson provided the report.
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