During his 2024 campaign, now-US President Donald J. Trump was consistent about his advocacy for a significant expansion of the tariff regime. What wasn’t clear was to what extent the tariff proposals were serious vs. negotiating postures, or whether the tariffs would be moderated (e.g. by a tiered structure) or delayed in their implementation.

Now, less than two months into the Trump administration, the markets are awakening to the reality of the promised tariffs. This past Monday, the additional 10% tariff (on top of prior tariffs) on China was amended to 20%. On Tuesday, the delayed 25% tariffs on US allies Canada and Mexico went into effect. As of this writing, the S&P 500 is down 6.7% from its Feb 19 high, and down 4.3% from just before Trump’s inauguration.

The following days saw strongly negative reactions from both US allies and the global markets – and moves by the Trump administration to moderate the tariffs’ effects. On Wednesday, Trump agreed to a one-month reprieve for the auto industry (the largest component of trade among the 3 North American trading partners), exempting vehicles and parts from the new tariffs but only until April 2. On Thursday, he signed two executive-order amendments exempting goods from Canada and Mexico that comply with the USMCA (United States-Mexico-Canada Agreement). (The exemptions are non-retroactive.) The USMCA was signed under the first Trump administration in 2020 as a replacement to NAFTA (North American Free Trade Agreement). Generally, to be USMCA-compliant, products need to meet “rules of origin” requirements – i.e. be substantially produced or sourced within the North American country – and in some cases, meet minimum-wage standards.

Before the tariffs were signed in early Feb 2025, the vast majority of imports from Canada and Mexico entered the US duty-free. In 2024, only 10% of imports from Mexico (e.g. some auto parts, passenger vehicles, and oil products) and only 22% of imports from Canada (e.g. some oil products) faced tariffs, and these were generally low (e.g. 0.1%).

38% of the imports from Canada and about 50% of the imports from Mexico came in duty-free under the USMCA, while another 40% of imports from Canada and Mexico came in duty-free outside of the USMCA (i.e. because the US doesn’t impose tariffs on many of these products). These imports that came in duty-free outside of the USMCA include a big chunk of Canadian energy products and potash, which are now seeing a 10% tariff. Overall, 62% of the imports from Canada and about 50% of the imports from Mexico remain exposed, even after Trump’s recent amendments. For these imports, the tariffs are now in effect.

Businesses that once imported their products duty-free are expected to try to show compliance with USMCA, given the new tariffs. Because USMCA rules are complicated, some businesses – particularly in the oil industry – had previously opted to pay relatively low tariffs rather than undertake the administrative burden to determine and prove that their products are compliant (e.g. certificates of origin, detailed production records, cost analyses). This could change as the stakes increase with higher tariffs.

Canada has initiated its first wave of retaliatory measures, imposing 25% tariffs on $30B CAD of US goods, including meats, dairy, alcohol, tobacco, cosmetics, wood, paper, tires, clothing, and shoes. This first set of Canadian tariffs will remain in place despite the amendments, until US tariffs are fully removed. A second wave was planned to follow for a total of $155B CAD of US goods, but this has been put on pause for now. Ontario will begin charging 25% more for electricity for 1.5M Americans in New York, Michigan, and Minnesota. Ontario and other provinces are also reportedly removing American-made alcohol from the shelves of government-controlled retail outlets. British Columbia is seeking to levy fees on commercial trucks traveling from the mainland US to Alaska. Canada has also filed a complaint with the WTO (World Trade Organization).

Mexican President Claudia Sheinbaum has taken a more conciliatory approach to Trump, and both have had positive things to say about each other. Under Sheinbaum, Mexico has taken actions on border security and extradition of drug traffickers, which Trump has touted. Mexico plans to announce its retaliatory measures this Sunday. At one point, it was reportedly considering tariffs from 5% to 20% on US cheese, pork, produce, manufactured steel and aluminum, and whiskey.

China has also responded with retaliatory measures to this week’s increase from 10% added tariffs to 20%. It applied 10% tariffs on US imports of soybeans, pork, beef, seafood, dairy, fruit, and vegetables, and 15% tariffs on chicken, corn, wheat, and cotton. It also added 15 US companies (including US drone company Skydio) to its export control list, halted US lumber imports, suspended the permits of 3 US soybean exporters, and initiated an anti-dumping investigation on US fiber-optic imports.

Certain industries are being hit particularly hard by Trump’s tariffs and the countermeasures, including toys (many of which are made in China), agriculture (due to China’s retaliatory tariffs) and construction (the US already imposes a 14.5% tariff on softwood lumber, which will now see a 25% tariff tacked on top). Trump has also signed 25% tariffs on steel and aluminum (without exclusions), which are set to take effect on March 12. The tariffs will be a hit to Canada as the US’ largest foreign supplier of these metals. The Trump administration is aiming for US independence in steel, aluminum, and lumber.

While neither of the executive-order amendments includes an end-date, the language from the Trump administration indicates they are viewing the exemptions as a stop-gap measure until April 2. April 2 is in focus as the date when Trump plans to announce a larger package of reciprocal tariffs. In mid-Feb, Trump issued a “Reciprocal Trade and Tariffs” memorandum directing the Commerce Secretary and US Trade Representative (USTR) to examine “non-reciprocal trade relationships” and determine the equivalent of a reciprocal tariff for each trading partner. The report is expected to be complete by April 1. Trump has said he will consider VAT (value-added tax) systems, digital service taxes, and non-monetary trade barriers as similar to a tariff.

Reciprocal tariffs will hit certain countries/regions harder than others. The White House has called out India, Brazil, and the European Union specifically for their tariffs and market controls. According to the Trump administration, across 132 countries and 600K+ product categories, US exporters faced higher tariffs more than 2/3 of the time vis-à-vis trading partners. With respect to Canada, while the vast majority of US imports into Canada comes in duty-free, Canada does maintain 150-300% tariffs on dairy products, poultry, and eggs above a certain quota.

The Trump administration has been highly focused on US trade imbalances relative to other nations. Trade deficits aren’t always bad but sustained trade deficits can have negative ramifications on national creditworthiness and competitiveness. (Cutting federal spending and encouraging household savings are noted ways to reduce trade deficits.) It’s unclear to what extent Trump’s tariff regime is about getting other countries to lower their trade barriers in the long run vs. generating direct revenue from tariffs. While Trump has touted tariffs’ ability to generate revenue for the US government, their effect is somewhat limited by the base of imports. Tariffs today bring in just 1.7% of federal revenue.

At least in the short term and possibly in the long run, the US economy will certainly suffer some pain. According to Yale’s Budget Lab, the tariffs on Canada, Mexico, and China collectively could increase inflation by 1-1.2% – likely extending the Fed’s pause on rate cuts – reduce real GDP growth by 0.6%, and cost the average US household about $1,600-2,000 in higher prices. Tariffs tend to be regressive taxes, with a heavy burden on households on the lower end of the income spectrum on a percentage-of-income basis. The sudden impact of the tariffs, and how they might roll through the economy, is raising the specter of recession, stagflation or even depression among economists.

The tariffs are spurring US trading partners to reduce their dependence on the US market. In Canada, for instance, business leaders are calling for a loosening of trade barriers between provinces. One study has suggested that eliminating these barriers could boost Canada’s growth by 3-8%. While the US will likely continue to be Canada and Mexico’s largest trading partner, its share of their trade could tick down from the current 75-80%.

For the US, perhaps the largest concern is that these tariff wars could poison cross-border relationships at a time when collaboration will be much needed. Its North American allies as well as its allies in Europe are saying the trust is broken “in a profound way” and relations will “never be the same.” The US may find that it’s hard to make friends when you need them.

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