By: Jai Verma, Research Analyst, GSDN

The United States are now officially in a Trade War, as new substantial tariffs on both sides will be in place from February 04, 2025 (Tuesday). The US President laid down the order of imposing 25% tariff on Canadian Goods sent to the US and 10% on Canadian energy. A few hours later Justin Trudeau retaliated “tonight I am announcing Canada will be to the US trade action with 25% tariffs against US $1,555 billion worth of American goods that’s nearly a quarter of everything America sends north of the border from Florida orange juice to household appliances, we are considering with the provinces and territories several non-tariff measures including some relating to critical minerals energy procurement and other partnerships.” All this while the two leaders haven’t even spoken to each other since Donald Trump’s inauguration and a potential Trade War has been on the horizon for some time the question is where do things go from here?

Trade Wars and Economic Tensions 

The global trade landscape has taken a hit over, the US president Donald Trump announced sweeping new tariffs hitting imports from Mexico China and Canada. He’s also suspending the D-Minimis exemption for Chinese Imports, this exemption previously allowed small value shipments under $800 to enter the US duty-free.

• Why the suspension?

Trump’s Administration cited National Security concerns with China, Mexico and Canada all under scrutiny the US is battling a deadly opioid crisis with fentanyl linked to 75,000 overdose deaths in 2023. Trump believes China and Mexico are supplying the chemicals used to make these synthetic opioids, by tightening trade rules he aims to enhance screening and crack down on illegal drug inflows. Platforms like Sheen and Temu have been shipping products directly to the US consumers without tariffs, therefore removing D-Minimis exemption forces Chinese importers to pay up levelling the playing field for US businesses.

Trump argues that the US has been losing billions of dollars due to unfair trade practices, his message make it in the United States or pay the price. Canada and Mexico retaliated with their own counter tariffs including 25% tax on US$ 30 billion worth of US goods while Beijing is preparing to challenge Trump’s move at the World Trade Organization signalling that more economic retaliation could be on the way.

Stock markets have dropped sharply across the globe amid fears of a full-blown trade War, the US dollar is strengthening while the Mexican peso, Canadian dollar and Chinese yen are falling even cryptocurrencies are affected with Bitcoin down over 4% now. Trump has hinted at tariffs on the European Union claiming unfair trade imbalances but for now the UK is spared.

Long-Term Impact on US-Canada Relations

The Bank of Canada just made its first-interest rate decision since a trade war with the US became a real possibility, they cut their overnight interest rate (a quarter % point) which is great news for borrowing money but they also acknowledged that a storm may be coming.

“We will tariff and tax foreign countries to enrich our citizens” was Trump’s promised tariffs have the potential to throw Canada’s economy into a tail spin tariff in the case of retracted significant trade conflict it would badly hurt economic activity in Canada. There is still a ton of uncertainty about how this will play out but the Bank of Canada did lay out a worst-case scenario. The Bank of Canada predicts that this would cause a significant decline in the volume of exports from Canada to the US which makes sense because tariffs are just taxes paid for by the businesses doing the buying. So if American companies suddenly have to pay more for the same Canadian goods because there’s a 25% tax on everything. In first case, Canadian might decide to buy less stuff to avoid the tariffs all together.

• What tariffs do?

The more expensive product make come up with ways of finding something cheaper, efficient and closer to home (decrease anybody’s willingness to buy). If demand starts decreasing for Canadian exports the net value exports could drop too, when less demand for product the price of that product falls as well and Bank of Canada is mentioning that would happen here whether anyone exporting to the US or not.  

The Bank of Canada’s next prediction according to these factors could cause Canada’s GDP to fall pretty significantly they acknowledge that the government could mitigate this by taking some of that tariff money that they start charging and pumping it back into the economy either to businesses or consumers themselves but still this would have a very material effect would have a very severe effect on economic activity. The Bank of Canada has cryptic opting not to give any real indication as a lot of uncertainty and it just didn’t seem very useful to provide guidance and when exactly how that’s going to play out through the economy, the Bank of Canada cutting interest rates when the economy weakens because if lower rates make it cheaper for Canadians to borrow money which makes it more likely that they’ll spend money and that can help stimulate a struggling economy, but it’s not so simple because it’s about higher prices at the same time growth will be weak inflation will be higher because that’s the direct impact of tariffs when commodities like fruits and vegetables get more expensive (inflation).

How will the markets be impacted?

The immediate impacts for his tariffs target Canada, Mexico and China. These are the top three exporters to the United States. Canada sends them oil, gas, aluminium. Mexico sends computers wiring and medical instruments as both Nations send cars and auto parts.

As per 2017 Canadian govt report talks about the interconnected auto manufacturing situation car parts across the US-Canada border six times before a vehicle is finished but what happens when blanket tariffs are in place then each of these transfers attracts an additional fee raising the price of the car multiple times over, and basically destroying the industry in its current form. It’s a similar situation with Mexico raw materials go to the US they are turned into parts then sent to Mexico for assembly and the final cars are then sold back in the US. This system will break too and this is just the automobile sector. The agricultural sector in both Mexico and Canada are intrinsically linked with the US as well

The Canadian agricultural ministry describes a typical American breakfast wheat grown in Canada processed in the US cranberries grown in Canada processed in the US same with oats strawberries and pork this breakfast plate does not work without free trade not in the current prices at the current prices anyway with Trump’s incoming tariffs and then Trudeau’s retaliatory ones the price of this all American breakfast will go through the roof in the short run anyway the us could try and substitute its dependence on Canadian agricultural goods. Maybe Americans can do without the famous Canadian maple syrup but the concern of tropical food from Mexico bananas and tomatoes and the controversial avocados which can’t grow in the American climate not at the same scale 63% of US vegetable imports come from Mexico about 50% of all fruits and nuts as well they come from Mexico. So with the new tariffs Americans should get ready for a less healthy diet or be prepared to shell out far more prices will almost certainly rise and it’s not the exporting countries that will bear them tariffs are paid by importers in the United States the people importing the cars, fruits, wood, oil these are US-based entities they will pay a fee to the US government to sell these products in the US market.

What usually happens is that they pass on the costs to the end consumers the customers the average American people basically it’s a new domestic tax American money will make its way to the government offers just because they want to keep eating (Mexican tomatoes) there are a lot of counterarguments to this one is that people will opt for domestic Goods instead they will buy.

• American another argument is that the importing companies will take a hit on their profits they will absorb the Tariff costs not pass them on to customers both these arguments rely on a fair retail corporate benevolence think about it why wouldn’t a domestic car company hike their own prices foreign cars just got more expensive an American company can also raise their prices by just a little less than their foreign counterparts
• The domestic company will start raking in extra profits while still being marginally more competitive than the foreign brand either customer who loses and the second argument about importers absorbing the Tariff costs which company do bet on to do that which company is so kind as to take a profit hit to Shield American customers
• The last argument in support of tariffs is the US dollar price the US dollar value will surge it’s already happening tariff supporters say this automatically makes foreign Goods cheaper countering the inflationary effects of tariffs this also helps improve trade deficits. Now, this argument also relies on an assumption that the dollar value will rise in proportion to the costs neatly cancelling out any price Rises but really when does anything happen.

So, the dollar value increase will help soften the blow but it probably won’t erase the effects completely meanwhile the dollar rise affects the rest of the world take India for example, the rupee has hit a record low it fell below 87 Rupees to a dollar, this means India’s imports got more expensive and exports became less valuable. Almost every country will experience this without deals to trade bilaterally in local currencies. Many countries are at the mercy of dollar fluctuations but local currency deals come with their own risks.

Trump has threatened tariffs on countries who ditch the dollar BRICS nations could face 100% tariffs he said and this includes India. so all software and service sales to the US could suddenly become uncompetitive so far Donald Trump has just targeted Canada Mexico and China his next Target could be Europe and then possibly the BRICS Nations basically everyone that the US runs trade deficits with everyone exporting things to the United States.  So, until unless the world finds a way to bypass the US, many are in for a rough.