Summary
- US president Donald Trump has announced tariffs on Canada, Mexico and China, starting on 4 February.
- The taxes on Canada and Mexico will be levied at 25%, while China will be hit with a 10% tariff.
- There is a special carve-out for Canadian energy imports, which will have a lower 10% tariff.
- Trump told the BBC that tariffs on the EU will “definitely happen”, but indicated that a deal could potentially be “worked out” with the UK.
- Asian markets fell on Monday in response to the news. European markets have also tumbled since opening.
What do tariffs mean for inflation?
Just as prices were coming under control, Trump’s tariffs could fan the embers of inflation on a global scale.
Firstly, US consumers will need to pay more for imports from impacted countries.
US businesses will feel the effects too, if they have imported goods or materials anywhere in their supply chain.
If costs increase, businesses could be forced to raise their prices in an attempt to protect their margins – another hit for consumers.
Furthermore, the countries that Trump has targeted are already starting to respond with retaliatory tariffs of their own, and so the problem spreads.
The effects won’t be confined to the US, Canada, Mexico and China either. Global economies operate in a tangled web of interdependence. If goods in the US suddenly become more expensive to produce because of tariffs, any other country that imports those goods will have to pay a premium too.
Carve-out for Canadian energy
Trump’s tariffs include a special carve-out for Canadian energy imports, which will be hit with a lower 10% tariff (as opposed to 25%).
According to the BBC, 61% of oil imported into the US between January and November last year came from Canada.
Canadian prime minister Justin Trudeau has previously said that Canadian energy “powers American manufacturing, businesses and homes.”
Speaking in recent weeks before Trump's tariffs were imposed, Trudeau added: “The alternative for [the US] would be more resources from Russia, China or Venezuela. Canada is a safe, secure and reliable partner in an uncertain world.”
Over the weekend, Trudeau announced 25% retaliatory tariffs against the US in response to the latest developments.
Canada and Mexico: is a recession on the cards?
“Since exports to the US account for around 20% of their GDP, today’s tariffs could plunge both the Canadian and Mexican economies into recession later this year,” said consultancy Capital Economics.
The effect of Trump's tariffs will be felt in the US too, though, with consumers now facing the prospect of higher prices. Capital Economics expects US inflation to rise further and faster than previously anticipated, exceeding 3% later this year.
European tariffs: “the writing is on the wall”
Although no tariffs have been directed at Europe so far, the “writing is on the wall”, according to Michael Field, chief market strategist at Morningstar. “That Donald Trump has no qualms about imposing them on his nearest neighbours, means that Europe too should be bracing for impact,” he added.
Trump recently told the BBC that the European Union has “taken advantage” of the US and is “way out of line” for not importing more US goods. In 2023 (the most recent year we have annual figures for), the US-EU trade deficit was $208.2 billion.
“They don’t take our cars, they don’t take our farm products, they take almost nothing. And we take everything from them,” Trump said.
Markets tumble as trade war heats up
Stock markets tumbled in Asia on Monday in response to the latest news from Washington. In Taiwan, the Taiex index shed 3.53%. In Japan, the Nikkei 225 closed 2.66% lower. Meanwhile, in South Korea, the Kospi fell 2.52%.
European markets have also tumbled so far this morning, as investors process the fact that the EU could be next on Trump’s hit list. The Stroxx Europe 600 is down more than 1% at the time of writing.
Meanwhile in the UK, the FTSE 100 is down more than 1% so far. Trump has indicated that a deal could be “worked out” with the UK to exclude it from tariffs, but even if this is the case, a global trade war would spell bad news for domestic markets and the economy.
This is not a drill
On 1 February, US president Donald Trump announced 25% tariffs on Canada and Mexico and a 10% tariff on China, due to kick in from 4 February. The trade wars have begun.
Trump made extensive tariff threats while on the campaign trail in the lead-up to the US election but, until recently, experts had been warming up to the idea that these were little more than a bargaining chip. The latest moves suggest otherwise.
Here’s everything you need to know – from what’s been announced to how markets have responded.