President Donald Trump’s 25% tariffs on goods from Mexico and Canada went into effect on Tuesday, along with a doubling of tariffs on some Chinese imports to 20%.
In response, Canada imposed 25% tariffs on nearly $100 billion of imported U.S. goods on Tuesday, including machinery, auto parts, and alcohol, and Ontario is enacting a 25% tariff on its energy export — the province powers 1.5 million homes in Minnesota, New York, and Michigan, per Bloomberg.
China also enacted tariffs on Tuesday — 10% to 15% on U.S. agricultural products and filed a lawsuit against the new tariffs with the World Trade Organization.
Mexico will announce its countermeasures on Sunday.
Canada and Mexico have had essentially tariff-free trading agreements with the U.S. for three decades, per USA Today. However, China and the U.S. have engaged in tit-for-tat tariffs since 2018.
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So far, the news has rattled stocks.
Here’s what we know about the tariffs and how they could affect consumers and businesses in the U.S.
Why is Trump implementing tariffs?
In an executive order signed on Monday, Trump stated the tariffs are meant to reduce the U.S. trade deficit and fight the ongoing fentanyl crisis.
Trump has stated that he is implementing tariffs to pressure Canada, Mexico, and China into stopping drugs like fentanyl from entering the U.S., per Fox Business. According to the Drug Enforcement Administration, nearly 70% of the 107,000 deaths from drug overdoses in 2023 involved opioids such as fentanyl.
Trump wrote in the executive order that China’s “failure” to “blunt the sustained influx of synthetic opioids, including fentanyl” presented “an unusual and extraordinary threat” and that he would increase tariffs in response.
The Trump administration says it is also using tariffs as a way to secure the border and stop the flow of undocumented immigrants from Mexico and Canada.
In a post on Truth Social in November, Trump said that the tariffs on goods would “remain in effect” until “Drugs, in particular, Fentanyl” and “all Illegal Aliens stop this Invasion of our Country!”
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What are tariffs and what will they mean for consumers?
Tariffs are taxes placed on goods imported from other countries. For example, a 20% tariff on Chinese goods means a $10 product would have a $2 tax added to the price. The importer would have to pay the tax to U.S. Customs and Border Protection when the product crosses the border.
Companies can absorb the additional charge or pass it on to customers in the form of increased prices.
The CEOs of Target and Best Buy have already indicated the companies will raise prices for consumers in response to the tariffs.
Target CEO Brian Cornell told CNBC Tuesday that produce prices would increase over the next few days as tariffs take effect. Cornell noted that Target depends on produce from Mexico in the winter, so shoppers could see prices rise for fruits and vegetables like strawberries and avocados.
Also on Tuesday, Best Buy CEO Corie Barry said on the company’s earnings call that American consumers were “highly likely” to see price increases in response to the tariffs. Best Buy sources about 55% of its products from China and 20% from Mexico, Barry stated.
However, Chipotle CEO Scott Boatwright told NBC on Sunday that the company intends to absorb the costs of tariffs and only raise prices if elevated costs turn out to be significant.
How is the stock market reacting to the tariff news?
U.S. stocks fell in response to the tariffs news, with the Dow industrials, S&P 500, and Nasdaq Composite all falling over 1% on Tuesday, per The Wall Street Journal.
In midmorning trading on Tuesday, the Dow lost 1.8% or more than 770 points, while the S&P and the Nasdaq each dropped more than 1.5%, per NPR.
The VIX volatility index, Wall Street’s fear gauge, hit its highest level yet this year on Tuesday, climbing to 24.35 at the time of writing after closing at 22.78 on Monday. The VIX average closing value this year was 16.86.
What are the benefits of tariffs?
The U.S. imported $1.2 trillion more goods and services in 2024 than it exported. Over 40% of imports overall came from China, Canada, and Mexico.
According to the Economic Policy Institute, tariffs benefit domestic producers by raising the U.S. prices of foreign goods relative to comparable goods produced domestically. Domestic companies also do not have to pay tariffs on the goods they produce and sell within the country.
Trump underscored this point on Truth Social on Tuesday: “If companies move to the United States, there are no tariffs!!!”
Tariffs can also increase government revenue. The Committee for a Responsible Federal Budget, a nonpartisan, non-profit organization, estimated that 25% tariffs on imports from Canada and Mexico would increase government revenue by $110 billion across the rest of the year. If the tariffs are made permanent, they would raise $1.3 trillion in revenue in the next ten years.
Still, experts at the Peterson Insitute for Internal Economics, an independent, nonprofit, and nonpartisan research organization say that tariffs won’t shrink the trade deficit.
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