Trump Threatens Tariff on China plus Mexico and Canada

Tariffs are a Negotiation Tool under Trump
President Trump announced plans to impose a 10% tariff on Chinese imports starting February 1, 2025, in response to China’s role in the fentanyl crisis affecting the U.S. This comes alongside a planned 25% tariff on imports from Canada and Mexico due to similar concerns. The administration aims to escalate trade tensions with China while warning of potential retaliatory actions from affected industries.
Key Points
• Trump plans a 10% tariff on Chinese imports linked to fentanyl exports.
• A 25% tariff on Canadian and Mexican imports is also expected.
• Tariffs aim to tackle the fentanyl crisis but could lead to retaliatory trade actions.
• Economists warn of inflation and potential negative impacts on U.S. economic growth.
• Trump directed agencies to review trade agreements without immediate new tariffs.

The announcement has sparked a mixed response from various stakeholders. Supporters of the tariffs argue that they are a necessary step to address the public health crisis caused by the influx of fentanyl and its analogs. They believe that holding foreign nations accountable for their role in drug trafficking is crucial for protecting American lives.
In response to Trump’s policies, China may adopt a dual strategy of retaliatory tariffs and diplomatic engagement. Historically, China has shown resilience in the face of trade pressures, often leveraging its vast market to counteract U.S. moves. As tensions escalate, we may witness a resurgence of trade negotiations where both parties seek to protect their interests while navigating the complexities of their economic interdependence.
What can China do?  A Financial Times article suggests that China can respond in three ways: retaliation, adaptation and diversification. Diversifification can mean more exports to the Global South. Our view is that is possible and likely plus China can use trade diversersion to avoid tariffs and ship to US. Adaptation would require monetary and fiscal stimulus. We doubt this will work since the Chinese economy is facing severe headwinds. Finally, trade retaliation is certainly on the cards. It would mean more than tariffs on the US. Expect more attacks on US companies like the antitrust probe against Nvidia or allegations against PVH Corporation (Calvin Klein and Tommy Hilfinger brands).
On the other hand, critics of the tariffs express concern about the potential for increased prices on consumer goods and negative impacts on industries reliant on imports. Retailers and manufacturers warn that such tariffs could lead to higher costs for consumers, further exacerbating inflation in an already strained economy.
Additionally, trade experts caution that these measures could provoke retaliatory tariffs from China, Canada, and Mexico, which may harm U.S. exports and disrupt supply chains. The agricultural sector, in particular, is wary of possible repercussions, as many farmers depend on exports to these markets. Canada and Mexico are highly dependent on the US and Trump’s tariff threats are likely to force some wins here. China will be a different story.
In 2018, China promised to buy more US goods as part of an agreement with the Trump at the time. Promises were never kept, thus expect a harder line by the US in any negotiations with China to dial down the coming trade war.
Additionally, the Trump administration has indicated that it will monitor the situation closely and is prepared to adjust its approach based on the reactions from these countries and the overall impact on the U.S. economy. They have also emphasized that these tariffs are part of a broader strategy to ensure national security and public health. There are also market considerations in proceeding slowing.
As February approaches, businesses and trade organizations are gearing up for what could be a turbulent period in international trade relations, with many calling for a more balanced approach that addresses public health concerns while mitigating economic disruptions. The unfolding situation will be closely watched, as it could set a precedent for future U.S. trade policy under the Trump administration and beyond.