Navigating the Realm of Trump's Tariffs
Canada, Mexico and China have long been the Top 3 trading partners with the United States. Though their respective positions within the Top 3 often change, they’ve consistently been the stalwarts of trade with the U.S.
Currently, Mexico is our largest trading partner. In 2024, according to the U.S. Census Bureau, the U.S. and Mexico exchanged a total of $839.9 billion in goods. Canada was No. 2 ($761.2 billion) while China was No. 3 ($582.5 billion). Combined, these three nations accounted for 41% of all U.S. trade in goods last year.
Dating back to his first term in office, President Trump has been highly critical of America’s global trading partners. He believes their tariffs, quotas and trade restrictions on American-made goods are unjust and hurt our economy, especially our manufacturing and agricultural industries. He also states a lack of willingness by our trading partners to address certain geopolitical issues – such as the flow of narcotics and migration – that he feels are a detriment to our nation.
In his first term, Trump was quick to impose tariffs on goods imported from many of our key trading partners. His goal was to establish more U.S.-friendly trade agreements and influence foreign policy decisions that impacted the U.S. This strategy has become a core staple in his second term.
On Feb. 4, a 25% tariff on all goods imported from Canada and Mexico was to go into effect. The one exception was a lower 10% tariff on Canadian energy products, primarily crude oil. But on Feb. 3, Trump announced a 30-day suspension on these tariffs due to concessions received from Canada’s and Mexico’s respective leaders. Canada agreed to enhanced security measures to stem the flow of drugs and illegal migrants into the U.S. Mexico agreed to deploy 10,000 troops to help secure the U.S. border.
On Feb. 4, Trump also imposed a 10% tariff on all Chinese imports. Trump has also threatened, but yet to impose, a 25% tariff on all goods imported from the 27-member nation European Union.
But on Tuesday, Trump revoked his 30-day suspension of the 25% tariffs on Canadian and Mexican goods. He also increased his Feb. 4 tariff on Chinese goods from 10% to 20%. As expected, Canada, Mexico and China have already announced retaliatory tariffs on U.S. goods.
Trump knows our trading partners would inherently respond with similar tariffs of their own. But Trump also knows he has something that all other nations do not possess – the largest economy in the world. And Trump has proven he is quick to use the size, strength and power of the U.S. economy as a sledgehammer to influence the trade and geopolitical policies of other countries.
With a Gross Domestic Product of $30.34 trillion, the U.S. is by far the world’s leading economic powerhouse. America’s economy accounts for more than 26% of the world’s total economic output, according to the International Monetary Fund. It’s 55% bigger than No. 2 China’s economy of $19.53 trillion. Canada’s economy ranks No. 9 ($2.33 trillion) and is just 7.7% the size of the U.S. economy. Mexico’s economy is No. 15 ($1.82 trillion) and is just 6% the size of the U.S. economy.
The U.S. economy is larger than the world’s third largest economy (Germany) through the tenth largest economy (Brazil) combined. As for Europe, the U.S. economy is 50% bigger than that of the 27-member nation European Union.
Trump’s strategy is that he knows there are few, if any, countries that can withstand an extended trade war with the U.S. Many Canadian and Mexican economists are already cautioning that such a trade war would quickly send their respective economies into a severe and deep recession. China’s economy, despite its size, is still struggling to recover from its harsh, and often controversial, zero-tolerance COVID mandates that were imposed on its citizens, businesses and national economy.
What we have learned is that Trump’s use of tariffs, or even the threat of use, is a very fluid situation. On Thursday, Trump suspended the 25% tariff with Canada and Mexico on all goods that fall under the USMCA (United States-Mexico-Canada Agreement). In 2020, Trump brokered the trilateral USMCA to replace NAFTA (North American Free Trade Agreement). Roughly 50% of all U.S. imports from Mexico and 36% of all U.S. imports from Canada are covered under the USMCA.
For now, the trade war with Canada and Mexico appears to be de-escalating. But as we’ve seen over the course of Trump’s tenure as president, things can quickly change.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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