Canada and Mexico vowed to hit back at the U.S. after President Donald Trump followed through on threats to impose 25% tariffs on imports of their goods, instigating a trade war that’s set to reshape global supply chains.

Canadian Prime Minister Justin Trudeau said the country will impose 25% tariffs against C$155 billion ($106 billion) of U.S. goods, while Mexican President Claudia Sheinbaum also pledged retaliation. China vowed “corresponding countermeasures” to Trump’s 10% levy on Chinese products, without immediately announcing any new tariffs.

A tit-for-tat tariff fight among the world’s major economies — Trump has warned Europe that it’s in his crosshairs, too — adds fresh headwinds to the outlook for global growth, for profits of companies suddenly facing higher import taxes, and for financial markets adjusting to new trade flows. 

“It marks a new phase of the trade war, which targets multiple countries, including allies and China, to meet U.S. economic and geopolitical policy goals,” said Gary Ng, senior economist at Natixis SA.

Bloomberg Economics estimated that Trump’s move will raise the average U.S. tariff rate to 10.7% from near 3% currently and “deal a significant supply shock” to the domestic economy. U.S. gross domestic product would suffer a 1.2% hit and a widely watched gauge of core inflation would increase by 0.7%.

Emergency Declared

In an executive order posted February 1 on the White House website, Trump invoked the International Emergency Economic Powers Act, a 1970s-era law that grants the president broad tariff authority in national emergencies. He had threatened Mexico with this measure in 2019, but talks ultimately ended that dispute without Trump using it. 

The responses from three of America’s biggest trading partners came shortly after he signed orders for the U.S. tariffs on February 1. The measures take effect at 12:01 a.m. on January 4, leaving only a small window for last-minute negotiations.

The weekend announcement meant the reaction from financial markets would have to wait until February 3 in Asia. The risk of a trade war has helped fuel a rally in the dollar since Trump’s re-election, on the assumption tariffs would fuel inflation and thus support U.S. interest rates, as well as the greenback’s safe-haven status. 

Trump’s threats last week drove the Bloomberg Dollar Spot Index up nearly 1%, its steepest climb since mid-November. The Mexican peso and the Canadian dollar each slumped.

WTO Case

China’s Commerce Ministry pledged to file legal proceedings with the World Trade Organization in a February 2 statement, but stopped short of explicitly threatening counter-tariffs. President Xi Jinping’s government has in recent months been treading carefully with Washington, avoiding any retaliation to trade curbs that could escalate tensions.

Trump’s tariffs deliver on a warning to the three countries for what he says is a failure to prevent the flow of undocumented migrants and illegal drugs, though he had also teased the possibility of a reprieve if Mexico and Canada took steps to address his concerns. 

The Republican’s orders also included retaliation clauses that would increase U.S. tariffs if the countries respond in kind. The new measures will be on top of existing trade levies related to goods from those countries. 

Energy imports from Canada, including oil and electricity, will be spared from the full 25% levy and will face a 10% tariff. White House officials said that was intended to minimize upward pressure on gasoline and home-heating oil prices.

Trump’s move is explosive in scale, and goes well beyond his first-term tariffs. Steep tariffs will raise the cost of key goods like food, housing and gasoline for Americans, while the overall fallout threatens to spill widely across the countries, which are the largest three sources of U.S. imports, accounting for almost half of total volume.

What Bloomberg Economics Says...

“We’d expect big tariffs to have big impacts — and what Trump has just announced is huge.”

—Nicole Gorton-Caratelli, Maeva Cousin and Tom Orlik. For full research click here

Trump campaigned on a platform of extensive tariffs, and he followed through, though dialing back planned measures on China while increasing them on his neighbors. Most mainstream economists and many business groups warn that trade levies will disrupt supply chains, raise prices for consumers already wary of inflation and reduce global trade flows.

Sweeping Measures

The move represents yet another instance where Trump is testing the bounds of his emergency authorities under federal law — already a hallmark of his second term in the White House. 

The tariff orders invoke the International Emergency Economic Powers Act and expand an earlier declaration to address what he calls a “threat to the safety and security of Americans.” 

Markets have been gripped by uncertainty as they awaited Trump’s decision on the tariffs, and there are now looming questions about how the levies will impact stocks, as well as companies and consumers.

Automakers such as General Motors Co., Ford Motor Co. and Stellantis NV, which have global supply chains and massive exposure to Mexico and Canada, could see significant swings. Industry groups warned that, because of the tight integration of U.S. and Canadian manufacturing, the imminent tariffs could have a steep impact on the industry. 

“The imposition of tariffs will be detrimental to American jobs, investment and consumers,” Jennifer Safavian, the president of Autos Drive America, said in an emailed statement. “U.S. automakers would be better served by policies that reduce barriers for manufacturers, ease regulations that hinder production and create greater export opportunities.”

Trump’s actions also closed a loophole that exempted packages worth less than $800 from tariffs. Extinguishing the so-called de minimis exemption for small parcels sent to the U.S. from the three countries could significantly impact online retail — though the scope of the measure wasn’t immediately clear. While such changes would most directly affect Chinese retailers, American consumers who benefit from those platforms’ cheap goods would likely suffer, too.

The U.S. loses a tremendous amount of tariff revenue by using the exemption, a U.S. official told reporters on a briefing call.

Parts of the U.S., including the Pacific Northwest and Northeast U.S., are deeply reliant on electricity or gas flows from Canada. Under an energy emergency Trump declared his first day in office, refined gasoline and diesel, uranium, coal, biofuels and critical minerals were all given the lower 10% tariff. 

Oil industry advocates, however, have warned against even a 10% increase in the cost of crude inputs into Midwestern refineries that have few near-term options to substitute with U.S. supplies. 

Democrats wasted no time in pouncing on messaging around how the trade moves could impact families’ budgets. “These tariffs will be devastating for American consumers,” Congressman Greg Stanton, an Arizona Democrat, and some 40 colleagues wrote in a letter on February 1.

“Trump’s tariffs on Mexico and Canada will make your life more expensive,” Stanton said more bluntly in a separate post on X. 

Retaliatory Steps

Mexico was strident in rejecting the Trump administration’s allegation that it had alliances with drug traffickers, and suggested the U.S. government curb demand and use of narcotics internally. 

“Drug use and distribution is in your country and that is a public health problem that you have not addressed,” Mexican President Sheinbaum said in a post on X. “It is not by imposing tariffs that problems are resolved, but by talking.”

Mexico will also implement non-tariff measures, while calling for cooperation with the U.S. on topics including security and addressing the fentanyl public health crisis, she said.

The Mexican economy could enter a “severe recession” if Trump’s tariffs remain in place for more than a quarter, according to Gabriela Siller, director of economic analysis at Grupo Financiero Base. “If the tariffs last several months, the Mexican peso depreciation could reach record highs.”  

Canada’s Trudeau said American beer, wine, food and appliances will be among the many items subject to Canadian tariffs, and his country is also considering measures related to critical minerals. He encouraged Canadians to buy locally made products and skip U.S. vacations.

The orders enacting the tariffs do create a process to remove them. Homeland Security Secretary Kristi Noem can inform Trump if the countries have taken adequate steps to alleviate concerns over migration and drugs, and the tariffs are removed if he agrees.

It’s not clear how realistic a prospect that is. Canada, for instance, already took steps to tighten its border to appease Trump, and it didn’t deter him.

In a speech on the night of February 1, Trudeau invoked Canada’s long history of partnership with the U.S. “We have fought and died alongside you,” he said, citing World War II, the Korean War and the recent war in Afghanistan.

Beginning of Talks

“Together, we’ve built the most successful economic, military, and security partnership the world has ever seen,” Trudeau said, urging Trump to partner with Canada on their shared challenges.

Although the European Union wasn’t among the targets of Trump’s executive actions on trade over the weekend, he’s often complained about what he sees as unfair treatment of American exports such as cars sold in Europe.

On February 2, German Finance Minister Joerg Kukies cautioned against over-reacting.

“One should not react in panic to the first decision, but rather see it as the beginning of negotiations, not the end,” Kukies told German business representatives in Riyadh at the start of a trip aimed at improving trade ties in the Middle East.