President Donald Trump has finally announced a series of tariffs against Mexico, China, and Canada—the three largest trade partners of the U.S. This comes after a long series of campaign promises to impose tariffs against the three nations and an initial delay during the month of February. China, Mexico, and Canada have all responded with tariffs of their own against US products, sparking what might well be the largest trade war in modern history.
The tariffs themselves mark a drastic shift in US foreign policy which, for years, was focused on free trade as a core pillar of diplomacy. Moreso with Mexico and Canada which are both members of the United States-Mexico-Canada Agreement (USMCA)—an ambitious free trade agreement negotiated by President Trump himself that allowed the free flow of products between the three nations. Now, the U.S. has broken with the USMCA by imposing 25% tariffs on all Mexican products and 25% tariffs on all Canadian products with the exception of energy which will have just 10% tariffs.
China, for its own part, received a much smaller set of tariffs than those originally promised by President Trump. Across the campaign trail, then candidate Trump suggested a blanket tariff of 60% on all Chinese goods. After he took office, however, he went for a much more restrained 10% tariff on all Chinese goods during his first month in office and an additional 10% announced with tariffs to Mexico and Canada. This brings tariffs on Chinese products to 20%.
To understand the true impact of Trump’s tariffs, it is crucial to understand the magnitude of trade between the U.S. and the three countries now subject to trade distortions. For years now, US trade has been dominated by Mexico, China, and Canada—with Mexico recently becoming the single largest trade partner to the U.S.
In 2023 alone, trade between the US and these three countries equaled well over $2.1 trillion. For reference, there are only 10 countries in the world with GDPs larger than the trade value between the U.S. and its three largest partners.
In the figure below, we plotted the total imports and exports between the U.S. and China, Mexico, and Canada. As the figure shows, the U.S. runs considerable trade deficits with all three countries. Mexico is the largest trade partner with imports valued at over $475bn and exports valued at over $322bn. It’s followed by Canada with imports valued at $418.6bn and exports valued at $354.3bn. China takes the third position with imports valued at $426.8bn and exports valued at $147.7bn.
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Using the numbers above, we can calculate the impact of Trump’s recently imposed tariffs using some simple math. After all, tariffs are a tax charged on all imports to a country. So, a 25% tariff on Mexican products will result in tax revenues equivalent to 25% of all Mexican imports. The one caveat to note is the distinction between energy imports and all other goods when it comes to U.S. trade with Canada. But this can be addressed easily noting that Canadian energy exports to the U.S. equaled some $3.2bn in 2023.
Taking this into consideration, we can graph the impact of Trump tariffs by country in the figure below. As we can see, but together, the Trump tariffs would result in impacts of up to $308.36bn. Mexico would be the most affected, with tariffs totaling $118.8bn, followed by Canada with $104.17bn, and China with $85.38bn.
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The problem here is that tariffs are often followed with price distortions. In sum, companies increase the price of their goods by the equivalent increase in tariffs to make up for lost revenues. This, in turn, results in an increase in costs to consumers or, more specifically, an increase in inflation for US consumers. Since US GDP was recently valued at $27.72T, an increase in the costs of goods of $308.36bn would result in a total increase of inflation of about 1.11%. That is, the Trump tariffs are likely to have a direct impact on everyday U.S. citizens in the form of increased prices.
This, of course, is not counting the retaliatory tariffs announced by the governments of China, Mexico, and Canada—which, in turn, would distort the prices of U.S. goods in their respective markets. Using the above data for U.S. exports, we were able to plot the expected impact from corresponding tariffs by China, Mexico, and Canada. As shown in the figure below, Canada would be the most affected with distortions of up to $88.59bn, followed by Mexico with distortions of $80.69bn, and China with $29.56bn.
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It didn’t take long for Trump’s tariffs to have a meaningful impact on financial markets. In the figure below, we plotted the value of the S&P 500 over the last month, with a clear downwards trend towards the end of the month—though this could be a result of other financial processes as well as the Trump administration’s harsh meeting with Ukrainian president Volodymyr Zelensky. However, it is hard to deny that the recent fall from 5,9549 points to 5,849.72 was mostly the result of president Trump’s tariff announcement. In all, over the last month, the value of the S&P 500 has fallen by 3.1%.
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It remains unclear whether President Trump intends to keep these tariffs across his administration or if he will withdraw them in the near future. For the meantime, they are a clear signal of changing political and economic interests. Companies should take these changing political circumstances into consideration when planning their supply chains and import/export operations.
At Desteia, we believe logistics operators should have all the necessary information to assess the impact of tariffs on their supply chain. If you’d like to see how increased visibility can help you understand the impact of a changing world, make sure to schedule a call with our team of experts.