The United States is once again at the center of a major trade confrontation, as President Donald Trump officially announced new tariffs against key economic partners. Effective February 1, his administration imposed a 25% tariff on imports from Canada and Mexico, while a 10% tariff was levied on goods from China. In addition to these measures, Trump also confirmed sector-specific tariffs against the European Union, a move that signals a much broader protectionist agenda.
For those who had hoped that Trump’s aggressive rhetoric on trade would remain mere posturing, the latest developments have shattered that expectation. During a press conference at the Oval Office on January 31, the president made it clear that he was serious about launching a full-fledged trade war, leading to immediate volatility on Wall Street. Unlike his first term, when it took nearly a year before he escalated trade tensions, this time he wasted no time—announcing sweeping tariffs within just two weeks of assuming office.
Trump justified the new tariffs by citing three key concerns: uncontrolled immigration, fentanyl trafficking—attributed to China, Mexico, and Canada—and the growing U.S. trade deficit. However, he made it clear that his actions would not stop there. He openly declared his intention to impose tariffs on the European Union as well.
“Should I impose tariffs on the European Union?” Trump asked during the press conference. “Do you want the political answer, or do you want the truth? Absolutely, absolutely. The European Union has treated us terribly.” He then launched into a criticism of German automobile imports, accused Denmark of obstructing U.S. sovereignty over Greenland, and condemned European trade policies. “They charge us 20% plus VAT, which is very similar, and it costs us a fortune. They don’t take our cars, they don’t take our farm products—almost nothing. And we run a tremendous trade deficit with the European Union,” he complained.
The Historical Use of Tariffs
Tariffs have long been used as an economic tool to protect domestic industries and, at times, as a means of penalizing foreign nations for unfair trade practices, such as government-subsidized exports or the dumping of goods at below-market prices. Before the U.S. federal income tax was established in 1913, tariffs were the primary source of government revenue. Between 1790 and 1860, they accounted for approximately 90% of federal income, according to Dartmouth College economist Douglas Irwin, who has extensively researched trade policy.
However, as global trade expanded after World War II, tariffs fell out of favor. The U.S. government required much larger revenue streams to finance its operations, shifting its reliance to income and payroll taxes. By the fiscal year ending September 30, 2024, the federal government collected around $80 billion in tariffs—just a fraction of the $2.5 trillion from income taxes and $1.7 trillion from Social Security and Medicare taxes. Despite this shift, Trump wants to return to a 19th-century economic model, relying more on tariffs as a revenue source. He also sees tariffs as a tool for exerting geopolitical pressure. In 2019, he threatened Mexico with tariffs to force its government to curb Central American migration.
Trump even claims tariffs could prevent wars. At an August rally in North Carolina, he said he could deter conflicts with a single phone call. “We’re going to charge you 100% tariffs,” he said, explaining that such a move would force foreign leaders to reconsider military aggression.
Could Tariffs Backfire?
While tariffs are designed to protect domestic industries, they also raise costs for companies and consumers that depend on imported goods. Additionally, they tend to provoke retaliatory measures from affected countries. For example, when Trump imposed tariffs on steel and aluminum, the European Union responded by slapping tariffs on U.S. products, including bourbon and Harley-Davidson motorcycles. Similarly, China retaliated by imposing tariffs on American soybeans and pork, strategically targeting farm states that supported Trump politically.
A study conducted by economists from MIT, the University of Zurich, Harvard, and the World Bank concluded that Trump’s tariffs failed to achieve their goal of restoring manufacturing jobs in the U.S. Instead, the research found that the tariffs “neither raised nor lowered U.S. employment” in sectors where they were intended to protect jobs. The American steel industry provides a telling example. Despite Trump’s 2018 tariffs on imported steel, employment in U.S. steel plants remained stagnant at around 140,000 workers. By contrast, Walmart alone employs 1.6 million people in the U.S.
Retaliatory tariffs, particularly from China, had a detrimental impact on American farmers. Although Trump’s administration attempted to offset these losses with billions of dollars in federal subsidies, the study found that the tariffs still resulted in negative employment effects. While the tariffs were largely ineffective as an economic policy, they succeeded politically. The study noted that support for Trump and Republican congressional candidates increased in regions most exposed to import tariffs, particularly in the industrial Midwest and Southern states with strong manufacturing sectors, such as North Carolina and Tennessee.
Could Tariffs Increase Inflation?
Trump’s tariffs are likely to contribute to inflation, raising the cost of goods for businesses and consumers. On Monday, analysts from Nationwide Insurance estimated that Trump’s proposed tariffs on Canada and Mexico could increase inflation by as much as 0.5 percentage points while reducing economic growth by 0.7 percentage points. The analysis also cautioned that potential retaliatory tariffs from Canada and Mexico could further amplify inflation and negatively impact GDP growth.
One of Trump’s primary strategies for controlling inflation has been lowering gasoline prices. However, tariffs on Canadian imports could undermine this effort by driving up fuel costs unless exemptions are introduced. “For example, 60% of oil and gas imports come from Canada,” said Martin from Oxford Economics. “A 25% tariff would lead to higher gasoline, diesel, and petroleum product prices for households and firms, especially in the Midwest and Rocky Mountain regions, where refineries are connected to Canada by pipeline.”
An analysis by PwC found that if Trump imposed 25% tariffs, businesses importing from Canada could face an additional $106 billion in annual import taxes, while those sourcing from Mexico could pay $131 billion more. Chris Desmond, a principal at PwC’s international trade practice, warned that the transportation and automotive industries would be among the hardest hit. “Many companies operating in Canada and Mexico are in industries that depend on imported components, including auto parts and even airplane components,” he said.
Desmond estimated that the total taxes paid on imports within the transportation sector could soar from $4 billion annually to $68 billion under Trump’s proposed tariff plan. It remains uncertain how businesses will manage these costs—whether they will absorb them, cut jobs, or pass them on to consumers.
Products That Could Be Affected by Tariffs
Trump’s proposed tariffs could drive up costs for a range of consumer goods, with American households expected to bear the financial burden. Dave Evans, CEO of Fictiv, a San Francisco-based supply chain management company, emphasized that tariffs ultimately impact consumers. “Unfortunately, it’s going to impact a lot of consumers,” he said, noting that companies typically pass these costs along rather than absorb them.
According to the Peterson Institute for International Economics, these tariffs will create “substantial costs for the average American household,” disproportionately affecting lower-income consumers. CNBC has reported that goods from China—including sneakers, furniture, and toys—are likely to become more expensive.
The Toy Association, which represents the U.S. toy industry, estimates that around 80% of toys sold in the U.S. are imported from China. Under Trump’s tariff proposals, the price of toys produced outside the U.S. could rise by up to 56%. For instance, a $20 Barbie doll, historically manufactured in China, could cost as much as $31.20.
The furniture sector may also be affected. While 30-40% of furniture is made in the U.S., about half of the raw materials—such as wood, fabrics, hinges, and screws—are imported. Even American-made furniture could see price hikes as companies face higher costs for these essential inputs.
From Mexico, prices for cars, beer, and avocados could rise. Tariffs on Canadian imports might also impact automakers, car buyers, and industries reliant on products like French fries and winter coats.
Trump’s Justification for Tariffs
Despite economic warnings, Trump remains firm in his belief that tariffs will strengthen the U.S. economy. He argues that shielding American industries from foreign competition will create wealth and enhance national security. During a speech on Monday, Trump reinforced his stance, stating, “Tariffs, I told you, most beautiful word in the dictionary.” He recalled how his advocacy for tariffs was once met with skepticism, but he remains convinced that they are essential to his vision of economic revival. In fact, Trump went as far as to rank tariffs among the most significant concepts in his political philosophy. “Tariff is, in fact, the fourth most beautiful word after ‘God, love, religion,’” he said.
Expanding Protectionism: New Sectors in Focus
Trump’s aggressive trade stance is not limited to the initial tariffs on Canada, Mexico, and China. He outlined plans to expand protectionist measures to a variety of sectors, although specific details remain scarce. “We’re going to put tariffs on oil and gas. That’ll happen fairly soon, I think around February 18. We’re also targeting steel, aluminum, and ultimately copper. Copper will take a little longer,” Trump stated.
The president also emphasized the importance of reshoring pharmaceutical manufacturing, framing it as a matter of national security. “The way to do that is by putting up a wall—a tariff wall,” he declared. He argued that America needs to return to the economic system that made it “richer and more powerful” between 1870 and 1913, when tariffs accounted for nearly half of the federal government’s revenue. While critics argue that tariffs effectively function as a hidden tax, raising costs for American consumers, Trump dismissed such concerns. “Tariffs are going to make us very rich,” he asserted.
Trump’s Unpredictable Trade Strategy
As with many of Trump’s economic policies, it remains unclear whether his aggressive stance is a genuine long-term strategy or a high-stakes negotiation tactic. A recent incident involving Colombia illustrates this unpredictability. On January 26, Trump announced via Truth Social that he had imposed a 25% tariff on Colombian imports as punishment for the country’s refusal to accept deported migrants. However, within days, the decision was quietly reversed, and no executive orders were issued.
When it comes to Canada and Mexico, however, Trump insists he is not bluffing. “Why should we be subsidizing Canada?” he asked rhetorically. “We’re not looking for a concession, and we’ll see what happens. And with Mexico, it’s the same thing.”
His trade war, whether real or psychological, is already affecting the global economy. Financial markets have been fluctuating wildly with each announcement, while foreign investors are growing hesitant to commit resources to these countries. Canada and Mexico, long seen as vital gateways to the U.S. market, are now facing growing economic uncertainty.
One notable example is Tesla CEO Elon Musk, who had previously planned to build a factory in Mexico. By mid-2024, however, he abandoned the idea entirely, wary of the economic instability triggered by U.S. trade policy.
Canada and Mexico in the Crosshairs
Unlike the Colombian case, the legal basis for imposing tariffs on Canada and Mexico is murkier. The administration has not officially linked the decision to a trade dispute, making it difficult to justify under existing U.S. trade laws. Trump’s team has hinted at invoking national security provisions, as it did with Colombia, but legal experts remain skeptical about whether such a justification will hold up under scrutiny.
One major complicating factor is oil. Trump has long advocated for lower fuel prices, raising questions about whether tariffs on Canadian petroleum would align with that goal. Canadian Foreign Minister Mélanie Joly, during a visit to Washington to negotiate a potential compromise, argued that Canadian oil is crucial to U.S. energy security. “We ship oil at a discount, and it’s refined in Texas. If it’s not us, it’s Venezuela,” she told The Financial Times. At the White House, Trump hinted at a possible exemption, suggesting a reduced tariff of 10% on Canadian oil.
A Trade Policy Failure?
Trump’s latest trade war highlights contradictions in his economic policies. It was he who pushed for the renegotiation of NAFTA, resulting in the United States-Mexico-Canada Agreement (USMCA) in 2020. The agreement, which increased North American content requirements in the auto industry, was supposed to reduce the U.S. trade deficit. Yet, it has not produced the desired results. Since 2019, the U.S. trade deficit with Canada has more than doubled, increasing from $26 billion to $61 billion by 2024. Similarly, the deficit with Mexico has surged from $99 billion to $170 billion.
Trump’s aggressive trade actions have also had unintended consequences. By targeting Chinese imports during his first term, he inadvertently pushed Chinese businesses to relocate their manufacturing operations to Mexico. The Rhodium Group, an economic research firm, estimates that Chinese companies have invested over $13 billion in Mexico, using it as a strategic entry point into the U.S. market.
Limited Options for Mexico and Canada
Despite their growing trade relationships with the U.S., both Canada and Mexico are in a weak negotiating position. They are highly dependent on exports to the U.S. and run significant trade deficits.
A major currency devaluation could counterbalance Trump’s tariffs, but such a move is unlikely. The U.S. continues to attract global capital through subsidies and highly competitive industries. According to a study by the Peterson Institute for International Economics, Trump’s tariffs would cause a modest 0.26% decline in U.S. GDP by 2027 but would inflict much greater damage on Canada (1.26% GDP decline) and Mexico (2% GDP decline by 2032).
Potential Retaliation from Canada and Mexico
Both countries have the means to retaliate, but doing so risks further economic damage. Canada’s outgoing Prime Minister Justin Trudeau—mockingly referred to as “Governor Trudeau” by Trump—has vowed to respond forcefully. “If the United States moves ahead, Canada’s ready with a forceful and immediate response,” Trudeau warned on X.
Former Canadian Finance Minister Chrystia Freeland, a leading candidate to succeed Trudeau, has proposed retaliatory tariffs targeting industries connected to Trump’s voter base. Specifically, she suggested a 100% tariff on Tesla vehicles and on American wine, beer, and spirits if Trump proceeds with his tariffs against Canada.
Amid this crisis, Canada has sought to align itself more closely with the U.S. by taking a tougher stance against Mexico. Trudeau criticized Mexico’s judicial reforms last summer, while Freeland, in November 2024, emphasized Canada’s opposition to Chinese trade practices, indirectly accusing Mexico of being a weak link.
Uncertain Future for U.S. Trade Relations
As negotiations unfold, all sides will seek to limit economic fallout. However, with the World Trade Organization largely sidelined, there is little hope for an impartial resolution.
The Wall Street Journal summed up the situation bluntly: “This may be the dumbest trade war in history.” Reflecting on America’s economic diplomacy, it recalled an old joke: “It’s risky to be America’s enemy—but it can be fatal to be its friend.”
Trump’s proposed tariffs aim to protect American industries but risk driving up consumer prices, fueling inflation, and provoking retaliation from key trading partners. While they have proven politically advantageous, studies suggest they have done little to restore jobs or boost economic growth. If implemented, these tariffs could place a heavy burden on businesses and households, making their long-term economic impact highly uncertain.
