President Donald Trump has granted Canada and Mexico a one-month reprieve from 25% tariffs that were set to take effect Tuesday, helping the S&P 500 to pare sharp early losses. Additional tariffs on China are still expected to come into effect on schedule.
Trump agreed to the postponement after Mexican President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau committed to step up efforts to stop drug smuggling across the border.
Before Trump shifted gears, the Trump tariffs announced over the weekend were forecast to hit GDP growth and boost the inflation rate in the near term, likely driving up the prices of General Motors cars, Nike gear, Apple iPhones and much more. The last-minute negotiation with Mexico and Canada has muddled that outlook.
Yet keep in mind that Trump tariffs were a major part of his campaign and an integral part of his multistep agenda. Trump's tax cuts would become much harder to pay for without the revenue from Trump tariffs.
Details On Trump Tariffs
On Saturday, President Trump followed through on the plan he announced in late November to slap 25% tariffs on imports from Mexico and Canada, and add a 10% tariff on imports of Chinese goods. The only real difference is that energy imports from Canada will face a 10% tax.
Trump confirmed in a post on Monday morning that tariffs on Mexican imports will be shelved for a month, during which Secretary of State Marco Rubio, Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick will work to negotiate a deal. Trump later agreed to a delay in tariffs on Canadian imports and Prime Minister Justin Trudeau said he would appoint a fentanyl czar. There's no indication yet of any delay in the imposition of tariffs on China.
Trump invoked his authority under the International Emergency Economic Powers Act in order the tariffs on Saturday. He justified them as crisis measures necessary to stem the flow of immigrants and illegal drugs such as fentanyl across U.S. borders.
However, just a day later, the White House changed its tune, explaining in a news release that "tariffs strengthen the American economy, raise wages, and create jobs."
Mexico was set to announce details of its plan to retaliate against the U.S. today, until Trump granted a 30-day pause. Canada had said it would impose a 25% tax on about $100 billion worth of U.S. goods in three weeks. Around $20 billion of those imports would have faced the tax starting Tuesday, if not for Trump's concession.
Trump's executive order to implement the tariffs calls for an unspecified escalation if any of the targeted countries retaliates.
Will Trump Tariffs Help The U.S. Trade Deficit?
Mexico and Canada together accounted about $900 billion in U.S. goods imports in 2023, or about 30% of the total. The integration of North American economies under Nafta and then the renegotiated U.S.-Mexico-Canada Agreement under President Trump means that some goods cross the border more than once, before and after finished assembly.
The USMCA deal set new quotas of 2.6 million passenger vehicle imports to the U.S. apiece for Canada and Mexico. Above those levels, vehicle imports can't qualify for duty-free treatment. Yet the Trump tariffs, if they take effect, will hit all imports.
Both Canada and Mexico are heading for recession if the tariffs are applied, economists say. Further, Trump has said he's getting ready to hit the European Union with tariffs.
Trump tariffs will hit U.S. exports in four ways. First is the direct retaliation to raise the price of U.S. goods, leading foreign customers to reduce purchases or find a substitute. Second, U.S. export industries will face higher costs due to tariffs on imported parts and materials that go into their finished products. Third, the hit to the economies of trading partners will depress their consumption. Finally, the dollar's rise close to its highest level since late 2022 will make U.S. goods more expensive due to the falling purchasing power of foreign currencies.
If U.S. exports are falling, as is likely, the only way to reduce the trade gap is to reduce imports by an even larger amount. That could happen if the economy turns down. Otherwise it will take some time as production will likely be insourced over a period of years.
Trump Tariffs: Impact on Tax Revenue, Inflation
The Budget Lab at Yale estimates that the Trump tariffs announced over the weekend, including those on Mexico and Canada, would raise about $1.3 trillion over 10 years, factoring in both retaliation and slower economic growth. Prices would rise about three-fourths of a percentage point. That equates to reduced purchasing power of $1,200 per household.
Trump's Broader Agenda Carries Risk
Oxford Economics estimates that the Trump tariffs, including those on Mexico and Canada, would shave 0.7 percentage point off of GDP growth this year. That assumes some tariff exemptions will be made, such as for building materials.
However, tariffs will help pay for tax cuts that should help keep growth on a firm track. Yet that combination would make it hard for the Fed to cut its key interest rate this year.
We could be in for a replay of what happened in late 2018, when global growth slowed amid escalating tariffs and a stronger dollar, but the Fed tightened. That provoked an S&P 500 sell-off of just under 20%.
But a few things are different this time around that could further complicate Trump's strategy. First, the Fed's key inflation rate has been stuck at 2.8%, instead of being well below the 2% inflation target. That gives monetary policymakers less room for error. Second, the federal borrowing needs are far greater than in 2017. The deficit has doubled to more than 6% of GDP, while federal debt is one-third higher as a share of the economy. Plus, interest rates are much higher too, raising the risk of unsustainable increases in federal interest outlays. Finally, to keep a fiscal crisis at bay, the Trump administration is also counting on major cuts to social programs, despite a thin majority in Congress and a recent track record of fiscal laxity.
Trump is pulling every lever at once to lift the U.S. economy to higher ground, but it may be like revving the engine in a rainstorm. There's a good chance it won't go smoothly.
S&P 500
The S&P 500 cut its losses after Mexico's reprieve from Trump taxes, closing off 0.8% in Monday stock market action, after being down around 2%.
The S&P 500 finished 2% below its record closing high on Jan. 23.
Nike stock fell a fraction Monday after initially tumbling below its 50-day line. Shares are in a downturn going back to late 2021.
GM stock slumped 3.15%, paring losses but closing below the 200-day line for the first time since late 2023.
Apple stock fell 3.4%, between it 50-day and 200-day lines. Shares reversed lower Friday on the Trump tariff threat after initially popping on earnings. BofA analysts said the 10% tariff would be manageable because about 80% of devices sold in the U.S. can be sourced from outside of China.
The U.S. Dollar Index, measured against a basket of advanced-economy currencies, surged close to 110 before the tariff delays, closing up slightly at 108.4.
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