North America lurches towards trade war, new China tariffs imposed

President Donald Trump acted on his March 4 tariff threats with the U.S.’s three largest trading partners, imposing 25% tariffs on most Canadian and Mexican goods and adding 10% across-the-board tariffs to existing duties on Chinese products, including the first 10% increase he imposed on Feb. 4.

The plan for tariffs remains unclear, likely due to internal division within the Trump administration. In congressional testimony, senior economic policy nominees declined to give many specifics in terms of revenue or negotiation goals for tariffs, other than to say the administration will use them to increase federal government revenue and as leverage for trade talks.

According to March 6 testimony by Michael Faulkender, nominee to be deputy Treasury secretary, there are three Trump administration objectives for tariffs: “One of them is they potentially are a source of revenue to the federal government. The second is they are to address longstanding inequities in the way that other countries have provided subsidies, manipulated currencies, engaged in technology theft. And then the third is as a negotiating tactic,” to increase U.S. leverage in addressing concerns with other countries. 

In a March 5 CNN interview, Senior Counselor to the President for Trade and Manufacturing Peter Navarro said simply, “When we trade with the rest of the world, we don't have allies. We have competitors.”

The broad ambiguity over which tariffs are meant to be temporary or permanent has frustrated members of Congress, both because they hear from constituents and businesses about economic impact and because they don’t know how much revenue to credit themselves from tariffs as part of the Republican-led tax and fiscal negotiations. Though executive action cannot be directly counted under the budgetary rules Republicans will use to advance the major economic package in the Senate, there is discussion of agreeing to increase the deficit by an amount similar to what Trump hopes to raise through tariffs — which function similarly to a sales tax on imports. 

• On March 5, the day after Trump began tariffs on Canadian and Mexican products, he announced exemptions for automobiles and parts imported by three large auto manufacturers: Ford, General Motors, and Stellantis, which owns Chrysler.
• On March 6, Trump announced a delay (until April 2, when he expects to put more tariffs in place) on tariffs for Mexican and Canadian imports that comply with the U.S.-Mexico-Canada Agreement, an update to NAFTA that took place during the first Trump administration. According to a White House official who provided comment (off-air) to a CNBC reporter, the administration deems approximately half of Mexican imports to be in compliance and 62% of Canadian imports to follow USMCA parameters. Canada said it would hold off on its second, much larger tranche of tariffs in response to the move. Trump’s order for the pause on some tariffs also reduced duties on potash, a key component in fertilizers, to 10% from 25%, putting the duty rate on that product at the same level as Canadian energy imports.
• Trump also paused a suspension of de minimis exceptions (currently for imports under $800) that had been applied to Chinese products. Many shipments from China fall under that threshold, so the administration said it needed time to create a system to implement the ending of the de minimis exception for China. That policy was also extended to Canada and Mexico on March 4.

Trump can act unilaterally on tariffs through trade powers granted to the presidency by Congress through multiple laws enacted over several decades. The lack of clarity affects policy decisions by lawmakers, as they want to effectively count tariff revenue while also weighing the economic impact of duties when rewriting the tax code. For more context, here are additional actions Trump is considering:

• March 12: 25% global steel and aluminum tariffs effective. Some were already in place, but aluminum increases and exemptions end (previously negotiated by both Trump and Biden).
• April 2: Trump promises “reciprocal tariffs,” factoring in not only tariffs but also value-added taxes (VATs), digital services taxes (DSTs), and non-tariff barriers (such as regulations, bans, etc.). All Mexican and Canadian tariffs suspended on March 6 are due to be reinstated.
• April 2 (as well): 25% auto tariffs effect, or an investigation launched. Trump suggests rolling out sectoral auto tariffs, possibly specific to the European Union (EU) or universal, as early as April 2, though a normal trade investigatory process could push the timeline several months. Trump also promised sectoral tariffs on pharmaceuticals and semiconductors, though it’s unclear whether an announcement will come on April 2 or later. The president has also threatened that he could escalate tariffs under this rubric on any country that retaliates against his initial tariffs, like Canada and China.
• More possible?: Trump campaigned on 10–20% across-the-board tariffs, 60% or more on China. More room to go on China, and more tariffs are needed to achieve 10–20% on average.

Countries whose exports are impacted by Trump’s tariffs have also responded or threatened retaliation:

• China imposed an additional 15% tariffs on natural gas and coal, another 10% on crude oil, agricultural machinery, and commercial vehicles, restricted exports to the U.S. of five critical minerals, and increased legal pressure on large U.S. companies. China said it would raise tariffs on $21 billion worth of U.S. products if the second 10% increase by the U.S. was not suspended by March 10. That includes an additional 15% tariff on U.S. chicken, wheat, corn and cotton, as well as an additional 10% duty on soybeans, sorghum, pork, beef, dairy products, and fruit and vegetables. China also launched investigations into U.S. companies, including a trade investigation over whether U.S. fiber-optic companies are in violation of anti-dumping provisions.
• Canada threatened to impose tariffs on US$107 billion worth of U.S. products in total, with approximately US$21 billion in immediate tariffs coming in response to the March 4 U.S. duties. These initial tariffs target politically symbolic products like beer, bourbon and orange juice.
• Mexico weighing 5% to 20% tariffs on American products including pork, cheese, fresh produce, manufactured steel and aluminum.
• The European Union adopted a new anti-coercion instrument, which could be triggered by Trump’s steel and aluminum tariffs. The ACI allows it to retaliate immediately as a whole against countries pressuring member countries economically for policy changes. During the last Trump administration, the EU targeted bourbon, motorcycles, orange juice among other U.S. exports. EU-U.S. trade tallies close to $1 trillion/year.

In a March 5 public interview, Ways and Means Committee Chair Jason Smith, R-Mo., whose committee holds jurisdiction, said he anticipated some kind of credit to federal revenue within ongoing tax and fiscal policy negotiations. But he captured the mood on Capitol Hill when asked about how he and fellow Republicans would incorporate tariffs into their tax changes.

“We don’t know what’s going to happen in the tariffs,” said Smith. 

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