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Trump administration imposes large, broad-based tariffs on Canada, China, and Mexico

Update: On February 3, President Trump announced an agreement to pause the effective date of the new tariffs on both Mexico and Canada for one month pending further negotiations.

On February 1 the Trump administration announced tariffs of 25% on goods from Mexico and Canada – with a carveout for energy imports from Canada. They also announced a 10% tariff on goods from China. These amounts are over and on top of any existing tariffs.

Tariffs can be a useful policy tool when used strategically – we at EPI have provided a defense of tariffs (including some passed in the first Trump administration) as part of strategic plans to protect economically important sectors in the past. But without a strategic plan, and applied broadly across all sectors, these tariffs will not provide a meaningful boost to U.S. manufacturing. 

And these announced tariffs are extremely broad-based – in what follows all statistics on trade and tariffs are based on 2023 full-year data from the United States International Trade Commission (USITC). According to this USITC data, imports from China, Canada, and Mexico combined account for over 40% of all imports into the United States – this means that the tariffs will have a substantial negative effect on the U.S. economy. If, for example, import flows from these countries did not change in response to these tariffs, these tariffs would raise taxes faced by U.S. importers by roughly $230 billion. The consensus of empirical research into tariffs indicates that the vast majority of these costs would be passed onto U.S. households. In reality, imports from these countries will likely fall sharply in response to these tariffs, but this decrease in supply for the goods they are providing would significantly push up prices even for domestically-produced goods that compete with imports. In short, U.S. households will feel noticeably higher costs as a result of these actions even if imports fall.

The strategy behind these tariffs is far from obvious. For example, the volume of imports is far less important to the wellbeing of a country’s manufacturing sector than the size of the trade deficit (the amount by which imports exceed exports). In 2023, for example, the U.S. trade deficit with China was one third larger than the trade deficit with Canada and Mexico combined. Given this, it seems odd that an aggressive raising of tariffs sees China as the country facing the smallest increase. For another, the reasons given for the tariffs and the implicit conditions demanded to remove them have essentially nothing to do with the health of U.S. manufacturing or U.S. jobs. Instead, it is a mishmash of demands relating to immigration and flows of fentanyl. This intermingling of issues is a new and unwelcome distraction for debates over trade policy.

Extremely broad-based and indiscriminate tariffs have occasionally been defended on the grounds that they are undoing some of the damage done by trade policy in recent decades to U.S. workers. It is commonly thought that the passage of the North American Free Trade Agreement (NAFTA) began an era where the interests of U.S. workers were shunted aside in issues of international trade. This is undoubtedly true in many ways.

But this week’s action pushes tariffs far above pre-NAFTA levels. For example, immediately before NAFTA the average effective tariff on goods imported from Mexico was between 2-3% – it will now stand at 25%. In short, the damage done by NAFTA to U.S. workers had far less to do with tariff levels than all of its other provisions, and raising tariff levels on nearly 40% of all U.S. imports will do little to undo this damage (in part due to the sharp retaliation this action will incur – retaliation that has already begun).

Further, it is worth remembering that NAFTA was re-negotiated under the first Trump administration, becoming the US-Mexico-Canada (USMCA) agreement. The actions of this week highlight that even the Trump administration sees its USMCA renegotiation as a failed and insufficient action. This week’s actions, implicitly constituting a second attempt by the Trump administration to re-orient American trade policy, are no more likely than the USMCA to provide any benefit to U.S. manufacturing and its workers.