Escalating Trade Tensions: U.S. Imposes Tariffs, Canada and Mexico Retaliate [Updated]


Trade Update • Feb 3, 2025

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n a significant escalation of trade tensions, the United States has announced substantial tariffs on imports from Canada, Mexico, and China, citing concerns over illegal immigration and drug trafficking. This move has prompted swift retaliatory measures from Canada and Mexico, signaling a potential trade war among North American partners.

Read More: Key Details on U.S. Tariffs & Canada’s Retaliatory Tariffs.

U.S. Implements Tariffs

On February 1, 2025, President Donald Trump signed an executive order imposing a 25% tariff on imports from Canada and Mexico, with a 10% tariff on Chinese goods. These tariffs are set to take effect on February 4, 2025, and are justified by the administration as necessary to address national security concerns related to illegal immigration and the influx of fentanyl into the United States.

Under the order:

  • A 25% tariff will apply to all Canadian and Mexican goods crossing the border after midnight on February 4, 2025.
  • A 10% tariff will be imposed specifically on energy imports from Canada.
  • The de minimis exemption for duty-free imports from Canada and Mexico will be eliminated.
  • A 10% tariff will be placed on Chinese goods, extending beyond previous tariff schedules.

The executive order, citing the International Emergency Economic Powers Act (IEEPA), the National Emergencies Act (NEA), and the Trade Act of 1974, argues that illicit opioids and drug trafficking networks constitute an ongoing national emergency. It accuses Canada of failing to coordinate effectively with U.S. law enforcement to curb fentanyl production and trafficking.

Canada’s Response [Update]

In response to the U.S. tariffs, Canadian Prime Minister Justin Trudeau announced a $155 billion retaliatory tariff package. As tensions escalated, Trudeau and President Donald Trump engaged in discussions regarding the impending tariffs. They spoke on February 2, 2025, and are set to converse again on February 3, 2025, just before the tariffs take effect.

While Mexico has secured a one-month reprieve from the tariffs, Canada remains uncertain about obtaining a similar delay. The Canadian government is not optimistic about receiving the same consideration as Mexico, according to reports from the New York Times. Despite ongoing diplomatic efforts, Canada is preparing for the full implementation of its retaliatory measures should no resolution be reached. (Reuters)

The initial phase includes a 25% tariff on $30 billion worth of U.S. goods, effective February 4, 2025, targeting products such as:

  • Orange juice
  • Peanut butter
  • Wine, spirits, beer, and coffee
  • Appliances
  • Apparel and footwear
  • Motorcycles
  • Cosmetics
  • Pulp and paper

A second phase, involving an additional $125 billion in tariffs, will be finalized after a 21-day public consultation period. Potentially affected products include:

  • Passenger vehicles
  • Steel and aluminum products
  • Fruits and vegetables
  • Aerospace products
  • Beef, pork, and dairy
  • Trucks, buses, recreational vehicles, and boats

The Honourable Dominic LeBlanc, Minister of Finance and Intergovernmental Affairs, and the Honourable Mélanie Joly, Minister of Foreign Affairs, reaffirmed that all options remain on the table, including non-tariff measures, should the U.S. continue imposing unjustified tariffs on Canada.

  • Less than 1 per cent of fentanyl and illegal crossings into the U.S. originate from Canada. The government will not stand idly by as Canada is unfairly targeted and will defend Canadian interests, jobs, and businesses.
  • These tariffs will disrupt U.S. auto production, oil refineries, and raise costs for American consumers, putting economic prosperity at risk.
  • To support affected Canadian businesses and workers, the government is establishing a remission process for exceptional tariff relief, with details to be announced soon.
  • Canada continues to work with provinces, territories, business, and labour leaders to present a unified response and advocate with U.S. decision-makers to safeguard the economy.

Mexico’s Response

Mexican President Claudia Sheinbaum strongly criticized the U.S. measures, rejecting claims that her government was complicit in cartel activities. “We categorically reject the White House’s slander that the Mexican government has alliances with criminal organizations, as well as any intention of meddling in our territory. If the United States government and its agencies wanted to address the serious fentanyl consumption in their country, they could fight the sale of drugs on the streets of their major cities, which they don’t do and the laundering of money that this illegal activity generates that has done so much harm to its population,” Sheinbaum wrote in her post on X.

Sheinbaum directed Economy Secretary Marcelo Ebrard to implement a “Plan B” involving both tariff and non-tariff retaliatory measures, though specifics remain undisclosed. In addition, she called for a bilateral working group to address the fentanyl crisis, emphasizing that “dialogue, not economic warfare, is the solution.”

U.S.-Mexico Agreement [Update]

President Trump and President Sheinbaum reached an agreement to pause the imposition of the 25% tariffs on Mexican goods for one month. In return, Mexico has agreed to deploy 10,000 National Guard troops to reinforce the U.S.-Mexico border and help combat fentanyl distribution into the U.S. Additionally, the U.S. will collaborate with Mexico to prevent the trafficking of weapons into Mexico. The agreement was reached during a call between Sheinbaum and Trump, and work will commence immediately in the areas of security and trade. (NY Post)

China’s Response [Update]

China’s position is firm and consistent. Trade and tariff wars have no winners. The U.S.’s unilateral tariff hikes severely violate WTO rules. This move cannot solve the U.S.’s problems at home and more importantly, does not benefit either side, still less the world.

China is one of the world’s toughest countries on counternarcotics both in terms of policy and its implementation. Fentanyl is an issue for the U.S. In the spirit of humanity and goodwill, China has given support to the U.S.’s response to this issue. At the U.S.’s request, China announced back in 2019 the decision to officially schedule fentanyl-related substances as a class. We are the first country in the world to do so. China has conducted counternarcotics cooperation with the U.S. side in a broad-based way. The achievements we have made are there for all to see. The U.S. needs to view and solve its own fentanyl issue in an objective and rational way instead of threatening other countries with arbitrary tariff hikes. Additional tariffs are not constructive and bound to affect and harm the counternarcotics cooperation between the two sides in the future.

China calls on the U.S. to correct its wrongdoings, maintain the hard-won positive dynamics in the counternarcotics cooperation, and promote the steady, sound and sustainable development of China-U.S. relationship. (FMPRC)

Industry Concerns

The National Association of Manufacturers (NAM) expressed deep concern over the tariffs’ impact on North American supply chains. Jay Timmons, NAM President and CEO, warned that one-third of critical U.S. manufacturing inputs come from Canada and Mexico, and a 25% tariff could disrupt production, increase costs, and threaten American jobs—particularly for small and medium-sized enterprises.

“However, with essential tax reforms left on the cutting room floor by the last Congress and the Biden administration, manufacturers are already facing mounting cost pressures. A 25% tariff on Canada and Mexico threatens to upend the very supply chains that have made U.S. manufacturing more competitive globally. The ripple effects will be severe, particularly for small and medium-sized manufacturers that lack the flexibility and capital to rapidly find alternative suppliers or absorb skyrocketing energy costs. These businesses—employing millions of American workers—will face significant disruptions. Ultimately, manufacturers will bear the brunt of these tariffs, undermining our ability to sell our products at a competitive price and putting American jobs at risk.” (NAM)

Potential Economic Impacts

Economists warn that escalating tariffs could lead to higher consumer prices, supply chain disruptions, and job losses. The automotive, energy, and agricultural sectors are expected to bear the brunt of these trade barriers.

  • Automotive Industry: Higher tariffs on steel and aluminum could increase vehicle production costs.
  • Energy Sector: A 10% tariff on Canadian energy imports may drive up fuel prices in the U.S.
  • Agriculture: U.S. farmers and ranchers, already facing challenges from previous trade disputes, could experience further market access restrictions.

The full economic impact will depend on the duration of the tariffs and any potential negotiations among the affected nations.

The imposition of new tariffs by the United States and the retaliatory actions by Canada and Mexico have heightened trade tensions in North America. As each country moves to protect its interests, these developments highlight the complexity of North American economic interdependence.

Businesses and policymakers alike are closely monitoring the situation, hoping for a resolution that prevents further economic disruption and maintains the stability of cross-border trade.

How GHY Can Help?

GHY specializes in helping businesses navigate and reduce the impacts of tariffs through strategic solutions tailored to their needs. Our experts can audit your supply chain to identify inefficiencies, uncover cost-saving opportunities, and ensure compliance with evolving trade regulations. We also employ tariff engineering techniques to optimize product classification and sourcing strategies, minimizing duty exposure and maximizing profitability.

By partnering with GHY, your business gains access to the tools and expertise needed to streamline operations and stay competitive in a challenging trade environment.

Contact Us Today! gts@ghy.com, or call +1 (800) 667-0771.

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