The New Trade War: What You Need to Know About U.S. Tariffs
We’ve known it was coming, but on February 1, President Trump made it official: The U.S. intends to levy a 25% tariff on imports from Canada and Mexico, plus a 10% tariff on imports from China. (This is on top of tariffs that were already in place.) The White House also announced that “energy resources” from Canada — essentially, oil — will have only a 10% tariff.
The Global Response
In response, Canada announced its own 25% tariff on $23 billion worth of American imports, with an additional $125 billion later. Then, on February 3, it was announced that tariffs on Canada and Mexico will be suspended for thirty days after both countries agreed to make changes to their border security.
On February 4, China announced their response: A 15% tariff on coal and natural gas imports from the U.S., and a 10% tariff on oil, machinery, and some automobiles. It’s a safe bet that further tariffs will follow unless the situation changes.
If you remember President Trump’s first term, you likely recall the “trade war” between the U.S. and China. While media coverage on this decreased after COVID, it’s worth noting that President Biden continued and increased many of the same tariffs. In other words, this is a fire that’s been raging for a while. These new tariffs, assuming they last, could kick off another trade war—one that may be even more impactful than before.
What Are Tariffs and Why Do They Matter?
A tariff is essentially a tax on imported goods and services. Whenever a U.S. business buys goods from a foreign country with a tariff on it, they must pay that tax along with the cost of the product itself. Rising tariffs can have major implications for both businesses and consumers. Additionally, when countries impose tariffs on U.S. products, it affects American companies that export goods abroad.
The Case for Tariffs
Traditionally, tariffs serve two main purposes:
- Generating Revenue – Before the federal income tax was created in 1913, tariffs were the U.S. government’s primary source of income.
- Protecting Domestic Industries – When foreign goods become more expensive due to tariffs, businesses may be more inclined to buy from domestic producers instead.
President Trump’s reasons for these tariffs have varied. In his first term, he aimed to decrease the trade deficit between the U.S. and China while encouraging more American-made products. This time, the White House has framed the tariffs as a means of securing the border and halting the flow of fentanyl.
It’s also possible that these tariffs serve as a negotiation tool. Canada and Mexico quickly moved to strengthen their border security in response, leading to a temporary tariff suspension. If further agreements are reached, the trade war may de-escalate quickly.
The Case Against Tariffs
While tariffs can benefit specific industries, they often create unintended consequences:
- Inflationary Pressure – If companies pay more for imported goods, they often pass those costs onto consumers, contributing to inflation. Canada and Mexico supply a wide range of essential goods, from food to automobiles, which could become more expensive.
- Trade Wars Hurt More Than They Help – When countries retaliate with their own tariffs, it can negatively impact industries on both sides. Canada’s tariffs, for example, target American orange juice, coffee, liquor, and more, which could hurt U.S. businesses.
- Tariffs Don’t Always Work – While the trade deficit with China narrowed under Trump, the overall U.S. trade deficit actually widened. Historically, large-scale tariffs have led to economic downturns, as seen during the Great Depression.
How Will This Affect the Markets?
Tariffs don’t typically impact the stock market directly, but they can create ripple effects. The key factor to watch is inflation. The Federal Reserve raised interest rates to 40-year highs to combat inflation, and while rates have recently been cut, the Fed has signaled that future cuts will be slow. If inflation rises again due to tariffs, interest rates could stay high, dampening investor enthusiasm.
What’s Next?
It’s still uncertain which tariffs will go into effect and how long they will last. If these tariffs successfully bring countries to the negotiating table, the trade war could be short-lived. However, if they persist, they could lead to economic disruptions, supply chain issues, and increased prices for consumers.
For now, while the markets have responded with short-term volatility, it’s too early to make major investment changes based on tariffs alone. My team and I are closely monitoring developments and will keep you informed of any necessary adjustments.
If you have any questions or concerns, please reach out. We’ll continue to stay on top of this evolving situation and keep you updated along the way.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Avenues to Wealth Financial Advisors and Cambridge are not affiliated.
Sources:
1 “White House Tariff Announcement,” The White House, https://www.whitehouse.gov/fact-sheets/2025/02/fact-sheet-president-donald-j-trump-imposes-tariffs-on-imports-from-canada-mexico-and-china/
2 “Canada’s response to U.S. tariffs on Canadian goods,” Government of Canada, https://www.canada.ca/en/department-finance/programs/international-trade-finance-policy/canadas-response-us-tariffs.html
3 “Trump pauses tariffs on Mexico and Canada, but not China,” Reuters, https://www.reuters.com/world/us/trump-says-americans-may-feel-pain-trade-war-with-mexico-canada-china-2025-02-03/
4 “China retaliates with additional tariffs of up to 15% on select U.S. imports,” CNBC https://www.cnbc.com/2025/02/04/china-levies-tariffs-on-select-us-imports-starting-feb-10.html
5 “12-month percentage change, Consumer Price Index,” Bureau of Labor Statistics, https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm
6 “Here’s what will get more expensive from tariffs on Mexico, Canada, and China,” CNN Business, https://www.cnn.com/2025/02/01/economy/trump-tariffs-mexico-canada-china-increased-costs/index.html
7 “America’s trade gap soared, final figures show,” Politico, https://www.politico.com/news/2021/02/05/2020-trade-figures-trump-failure-deficit-466116
8 “Fed cuts key interest rate but signals elevated inflation is likely to persist,” https://www.nbcnews.com/business/economy/federal-reserve-interest-rate-cut-december-2024-much-economy-rcna184586
