Trump imposes tariffs on Canada, Mexico and China, raising prospect of inflation and trade conflict

PALM BEACH, Fla. (AP) -- President Donald Trump on Saturday signed an order to impose steep tariffs on products imported from Mexico, Canada and China -- a campaign pledge that could lead to higher inflation and harm businesses across North America if left unaltered.

This decision may lead to the economy and the president's policy agenda being paralysed, although the Republican president tweeted that it was necessary 'to protect Americans'.

The decision poses an economic conflict with the country's two main partners in trade -- Mexico and Canada -- which could lead to severe counteraction from those two nations. If sustained, the tariffs could worsen inflation such that voters may lose confidence that Trump could deliver, as he promised, on lowering the prices of food, gas, housing, autos and other everyday purchases.

Trump employed an economic determination that allowed for imposition of tariffs of 10% on all the imports from China and 25% on imports from Mexico and Canada. Import of energy from Canada, including oil, natural gas and electricity will be taxed at 10 per cent.

The tariffs would take effect on Tuesday, which may potentially derail the economy in North America. A new analysis by the Budget Lab at Yale provided the possible damage to the U.S. economy, and said that the average U.S. household would be worse off by $1,170 from the taxes. Economic growth would slow, and inflation would increase — and it could be worse if Canada, Mexico and China decide to retaliate.

For the moment, Mexico is going to act reasonably as it discusses its options.

Speaking on Saturday, Mexico President Claudia Sheinbaum at an event promoting a government housing program outside Mexico City said, 'I'm calm, I've been saying since yesterday, because I know that Mexico's economy is very strong, very solid'.

An administration official, who spoke on condition of anonymity in order to brief reporters, said the lower rate on energy was to avoid any sudden spike in the price of gasoline or utilities. That's a sign White House officials understand the gamble they're taking on inflation. Price leaps under former President Joe Biden infuriated the voters who brought Trump back to the White House last year.

There was no provision for exemptions in the order signed by Trump, the official said, which could hurt homebuilders who depend on Canadian lumber, farmers, automakers and many other industries.

The administration is imposing the tariffs to fight the three countries' role in the production and distribution of fentanyl, and also to force Canada and Mexico to limit illegal entry into the United States.

The official did not outline any specific targets that could be met in order to remove the new tariffs, indicating only that the best indicator would be reduced fentanyl related deaths.
It would also allow for Canadian imports of less than $800 to be tariffed. Imports of this kind are currently exempt from customs and duties when entering the United States.

'It doesn't make much economic sense,'' said William Reinsch, senior adviser at the Center for Strategic and International Studies and a former U.S. trade official. ''Historically, most of our tariffs on raw materials have been low because we want to get cheaper materials so our manufacturers will be competitive... Now, what's he talking about? He's talking about tariffs on raw materials. I don't get the economics of it'''

In making a major political bet that his actions will not significantly worsen inflation, create financial aftershocks that could undermine the stability of the world economy or alienate voters, the Republican president may have put himself in a stronger or weaker position. AP VoteCast, a wide-survey of the electorate in last year's election, found that the U.S. was split on support for tariffs.

With the tariffs, Trump is fulfilling the guarantees that are at the core of his economic and national security policy. But his sincerity regarding the issue was clear to some of his allies, who had downplayed the likelihood of higher import taxes as a negotiating ploy.

It suggests that tariffs will be a continuing feature of his second term, and the president is planning to impose more import taxes. On Friday, he talked about imported computer chips, steel, oil and natural gas, as well as against copper, pharmaceutical drugs and the European Union — which could essentially make the U.S. economy an enemy of most of the world.

It is not clear how the tariffs can impact business investment that Trump said would occur due to his plans to cut corporate tax rates and remove regulations. Tariffs, which increase prices for consumers and businesses by making it more expensive to import goods, are an example.

Many voters chose Trump in the November election because they thought he could handle inflation better than Biden. But in the University of Michigan's index of consumer sentiment, inflation expectations are creeping up as respondents expect prices to rise 3.3%. That would be higher than December's consumer price index report of 2.9% annual inflation.

Under Biden, prices rose, and voters became frustrated, and Trump said the government should get more of its revenue from tariffs, as it did before the income tax was added to the Constitution in 1913. But, as economic data indicates, he asserts that the U.S. was the wealthiest nation in the 1890s under President William McKinley.

'We were the richest country in the world,' Trump said on Friday. 'We were a tariff country.' The future of Canada, according to Prime Minister Justin Trudeau, is not looking too good, but he assured Canadians that Ottawa has what it takes to levy counter tariffs if necessary and that the U.S. penalties will be counterproductive.

Trudeau said that Trump has demanded that Canada increase spending on the border by C$1.3 billion (US$900 million) and has agreed to purchase new helicopters, new dog teams, and imaging tools.

Trump still has to get a budget, tax cuts, and an increase in the government's legal borrowing limit through Congress. His tariff plan could strengthen his hand or weaken it.

Democrats were quick to state that any inflation going forward was the result of Trump, who is about to begin his third week back as president.

'You're worried about grocery prices. Don's raising prices with his tariffs,' Senate Democratic Leader Chuck Schumer of New York posted on X. 'You're worried about tomato prices. Wait until Trump's Mexico tariffs make your tomato prices rise.... You're worried about car prices. Wait till Trump's Canada tariffs increase your car prices.' He wrote in a series of posts.

The Associated Press' Christopher Sherman in Mexico City and Paul Wiseman in Washington contributed to this report.