As of Jan 31 2025, President Trump declared a national emergency and invoked the International Emergency Economic Powers Act (IEEPA)* to impose additional tariffs on imports from China, Canada, and Mexico (although Mexico and Canada’s tariffs have now been paused as mentioned later). He has placed a 10% tariff on Chinese goods (in addition to existing tariffs where relevant), and a 25% tariff on Canadian and Mexican goods, with Canadian energy products subjected to a lower 10% rate. The tariffs are claimed to be necessary to reduce the risks posed to the USA by illegal immigration and fentanyl, with all three countries blamed for these issues.
Shots have well and truly been fired now, so now what?
*This Trump administration communique represents their points of view, so feel free to read additional resources on the topic.
I go through the situation in detail in this video:
How will the tariffs impact American manufacturers with Asian supply chains?
For American companies manufacturing products in China, particularly those relying on Chinese components, the new tariffs present immediate challenges. The additional 10% duty increases the cost of imported goods and components, potentially eroding profit margins or leading to higher prices for consumers.
A critical concern is whether this 10% tariff applies uniformly across all products and components from China, including those destined for final assembly in the U.S. If so, which is as it seems, companies that import Chinese components for domestic assembly—a practice encouraged to boost U.S. manufacturing jobs—may find their cost-saving strategies undermined. This scenario raises questions about the policy’s alignment with the administration’s broader economic goals.
Suspension of ‘De Minimis’ shipments from China, Canada, and Mexico
The executive orders also suspended the duty-free exemption for low-value shipments under $800, known as the ‘de minimis’ rule (We discussed why this was probably on the cards with American supply chain expert Owen Haacke a month ago) from the three targeted countries.
They claim that this exemption has been exploited to smuggle fentanyl and its precursor chemicals into the United States from places like China. The suspension aims to curb the flow of fentanyl, which caused nearly 75,000 overdose deaths in 2023.
Note that, according to Reuters:
Trump’s orders do not contain any language suggesting a global or permanent suspension of the de minimis status, leaving open the possibility that fentanyl shipments could still arrive unchecked as long as they do not originate from China, Canada or Mexico.
These measures could also impact Chinese e-commerce companies like Shein and PDD Holdings’ Temu, which have used the exemption to evade tariffs. However, even with the suspension of De Minimis shipments, there are relatively simple declarations for low-value shipments (under 2,500 USD), so it doesn’t mean everything will be subject to very heavy paperwork and the ‘single smaller shipments’ route could perhaps still be used to flood the market with cheap clothing or even as a route for banned substances.
Might overseas businesses use transshipment to avoid tariffs?
Even in the previous Biden administration, China was said to have avoided tariffs by shipping goods through Mexico (another reason for Trump to be annoyed with both countries). Partly contributing to Mexico becoming the largest exporter of goods to the USA. More scrutiny of transshipments seems likely because any loopholes that weaken the tariffs will not be welcome.
According to CLA:
To qualify as the new country’s product, it must undergo substantial transformation. The U.S. Department of Commerce requires products to undergo. Commerce states “Substantial transformation means that the good underwent a fundamental change (normally as a result of processing or manufacturing in the country claiming origin) in form, appearance, nature, or character, which adds to its value an amount or percentage that is significant in comparison to the value which the good when exported from the country in which it was first made.”
So the CBP will be keeping a close eye on countries that are importing more parts and materials from, say, China, and blocking shipments as required. So will American importers find that other countries in Asia which may have been tempting alternatives to China, such as Vietnam, the Philippines, and Singapore, or Mexico, who now also run increasing trade surpluses with China and the USA, are also soon out of the question?
Will there be retaliation?
It is not when, but if there will be retaliation from the targeted countries.
China
China is open to coming to the table for trade talks to attempt to cool down the situation. According to the WSJ:
Beijing is readying an opening bid to try to head off greater tariff increases and technology restrictions from the Trump administration—a sign that China is eager to get trade talks going.
However, in the past, China invoked “tit-for-tat” tariffs on U.S.-made products (with limited effect due to the trade imbalance). Beijing is preparing an opening bid to resume trade talks with the Trump administration, signaling China’s eagerness to avert greater tariff increases and technology restrictions. China’s proposal includes revisiting the 2020 Phase One trade deal, which required China to increase purchases of American goods by $200 billion, a target they failed to meet. Alongside increased purchases, China plans to invest more in the U.S. and reduce exports of fentanyl precursors.
Update Feb 4th
China has already invoked its own retaliatory tariffs, announcing 15% tariffs on US coal and liquified natural gas, and 10% on crude oil, farm equipment and some vehicles to begin on 10 February. They also launched an anti-monopoly investigation into Google and added two US firms to its “unreliable entity list”: PVH Corp, the holding company for brands including Calvin Klein, and biotechnology firm Illumina which they claim are damaging for domestic companies (firms on this list may be fined and face other penalties such as foreign staff’s work permits being cancelled).
Canada
On Saturday, Feb 1st, Canadian President Justin Trudeau announced retaliatory tariffs with 25 per cent tariffs against $155 billion worth of American goods and encouraged citizens not to purchase American products. The full list can be seen here and includes many everyday products that would previously have been purchased by Canadian consumers.
These consumers may now turn elsewhere rather than pay an extra 25%. Interestingly, in British Columbia, some stores have already started removing (the far more expensive) American liquor from the shelves and placing notices urging customers to buy local (Source: Bluesky):
Update Feb 4th
Prime Minister Trudeau made a series of commitments to President Trump for him to now agree to pause the tariffs for 30 days. According to the CBC:
To get Trump to shelve his punishing tariffs, Trudeau told him Canada is pressing ahead with a previously announced $1.3-billion border security plan that includes reinforcing the 49th parallel with new choppers, technology and personnel and stepping up its co-ordination with American officials to crack down on Trump’s stated priorities: illegal drugs and migrants.
Trudeau said, all told, there will be 10,000 front-line personnel working along the border as part of a push to make it safer.
Mexico
While specifics have not yet been announced, the LA Times wrote:
Mexican President Claudia Sheinbaum also struck back, criticizing the U.S. for its high levels of drug consumption and for failing to recognize what Mexico has done to slow migration. Sheinbaum said Mexico would also retaliate with tariffs on American imports, adding: “Problems are not resolved by imposing tariffs, but by talking and engaging in dialogue.”
Update Feb 3rd
As of Monday 3rd Feb, the tariffs on Mexico have been ‘paused for one month.’ CNN reported:
Sheinbaum said Monday both sides also reached agreements on security and trade.
Mexico will immediately reinforce the border with 10,000 members of its National Guard, while the US committed to working on preventing high-powered weapons from being trafficked to Mexico, Sheinbaum said.
Have Mexico and Canada ‘caved’ into Trump’s threats?
Some may see it that way, but it just goes to show that under the new Trump administration, the USA is not afraid to flex its muscles and put pressure on trading partners (allies and rivals alike) to get what it wants. While the two countries can invoke their own tariffs, their citizens would still likely be affected by rising prices on many imports from the USA which would not be welcome.
As mentioned in the video, the threats of the tariffs were Trump using the ‘stick’ approach to drive Mexico and Canada to beef up border security and invest their manpower and money into doing so. It remains to be seen if he will ever use the ‘carrot.’
American importers bringing in products from Mexico and Canada are probably issuing a sigh of relief, at least for now, but those importing products from China are still facing an uncertain near future.
How might the EU respond to tariffs?
The EU is also in the President’s crosshairs, and he described their trading relationship with the USA as “an atrocity,” language surely meant to provoke. The UK may escape the worst of Trump’s tariffs, as he seems to believe he can come to an agreement with Prime Minister Kier Starmer.
As of now, the European Union has also expressed its regret over U.S. President Donald Trump’s decision to impose extensive tariffs on Canada, Mexico, and China, indicating it would firmly respond if such measures were extended to Europe. In the NYT, Mette Frederiksen, the prime minister of Denmark, told reporters in Brussels on Monday morning:
“I will never support the idea of fighting allies. But of course, if the U.S. puts tough tariffs on Europe, we need a collective and robust response.”
Trump used the International Emergency Economic Powers Act to levy tariffs, but should he even use it in this way?
The IEEPA, enacted in 1977, grants the President authority to regulate international commerce after declaring a national emergency in response to any unusual and extraordinary threat to the U.S. that originates from abroad. Historically, this act has been utilized to impose economic sanctions, restrict trade and financial dealings, and freeze assets connected to hostile foreign entities. Trump previously used it to enable him to use federal funds to construct the wall on Mexico’s border.
However, using the IEEPA to impose tariffs is unprecedented and stretches legal boundaries. Legal experts expect challenges soon, questioning its validity and necessity. Critics argue that the connection between the declared emergencies and the imposed tariffs is tenuous, potentially leading to prolonged legal battles. For example, U.S. Senator Tim Kaine, a Democrat, last month introduced legislation, to restrict IEEPA’s use for tariffs, arguing it was never designed or intended for such tariffs.
Some questions we still need answers to…
Time will tell if this economic policy is sensible, but several questions are hanging over Trump’s economic policy regarding tariffs.
- Is it an extra 10% on top of any existing tariffs for all products and components coming from China? So, if a company imports components from China for final assembly in the USA (which was Trump’s promise on the campaign trail: more jobs for USA workers) they may not save any money. How does that make any sense when the overarching goal is to strengthen American businesses?
- Will other Southeast Asian countries soon be tariffed in a similar due to their close connections with China (such as Vietnamese manufacturing widely using Chinese parts and materials) or trade imbalances with the USA? If so, does this further hurt the American consumer?
- Will most OEM Chinese suppliers agree to absorb a part of that tariff, in the form of a price reduction? This is hard to say right now and depends on the relationship with their American customers. It seems unlikely that SMEs will be able to count on their Chinese suppliers to share the load.
What about the Chinese companies that “own” the product design and work with American importers to distribute those products? There is usually more margin involved, in some cases, they can be persuaded to reduce their price. - There is also a retaliation clause in the executive order which promises further tariff increases if the trading partners invoke their own tariffs on American goods. Will this be enacted by Trump, possibly further increasing costs for American consumers?
What should American importers do now?
American companies that manufacture in Asia are undoubtedly evaluating their supply chain strategies. Supply chain experts may be able to provide advice about the cost implications and compliance requirements of Trump’s new tariffs.
As we’re at the start of the year, it may be a good idea to plan to source alternative supplier options and adjust your pricing strategies.
From what we know about Trump’s prior term, the situation is not necessarily going to remain like this. This is most likely a gambit from the new administration to open upcoming negotiations from a strong position (as we saw with Mexico and Canada). And, if much higher tariffs do apply on made-in-China goods, they won’t just appear overnight with an executive order. There will be negotiations and the US Congress will probably be involved, so you will hopefully have time to prepare.
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