Trump’s tariff threat to top U.S. trading partners roils markets

President-elect Donald Trump vowed additional tariffs on Mexico, Canada and China, shaking markets with his first specific threats to the U.S.’s top trading partners since his election win three weeks ago.

Trump said he would impose additional 10% tariffs on goods from China and 25% tariffs on all products from Mexico and Canada, in posts to his Truth Social network on Monday.

The US dollar staged a broad advance Tuesday, with the Mexican peso and the Canadian dollar among the worst performers. US Treasuries fell, with the yield on 10-year notes rising two basis points to 4.3%, partially reversing the reaction to Scott Bessent’s nomination last week as Treasury secretary, which weighed on the dollar and boosted US bonds amid optimism of a more measured approach to trade relations.

Trump’s market-moving threats were a stark reminder that he plans to wield tariff authority, or at least threaten to use it, as leverage against allies and adversaries alike. It’s another sign of his break from the international order where low tariffs are the goal and rules exist to discourage overreach of punitive trade actions.

In his Truth Social posts, Trump cast the new import taxes as necessary to clamp down on migrants and illegal drugs flowing across borders.

He accused China of failing to follow through on promises to institute the death penalty for traffickers of fentanyl, writing that “drugs are pouring into our Country, mostly through Mexico, at levels never seen before.”

“Until such time as they stop, we will be charging China an additional 10% Tariff, above any additional Tariffs, on all of their many products coming into the United States of America,” Trump said.

In another post, the incoming president also vowed to hit Mexico and Canada with a 25% tariff on “ALL products,” saying he would sign an executive order to that effect on his first day in office.

“As everyone is aware, thousands of people are pouring through Mexico and Canada, bringing Crime and Drugs at levels never seen before,” he said. “This Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!”

Shortly after Trump’s post, Canadian Prime Minister Justin Trudeau contacted the president-elect and the two leaders had a phone call to discuss border security and trade, according to a government official with knowledge of the matter.

Immigration response

Trudeau pointed out to Trump that the number of migrants who cross the Canadian border into the US is minuscule compared to those who cross from Mexico, said the official, who spoke on condition of anonymity.

Canada said it’s working closely with US law enforcement agencies every day to disrupt the “scourge of the fentanyl coming from China and other countries,” according to a statement by Deputy Prime Minister Chrystia Freeland and Public Safety Minister Dominic LeBlanc.

Liu Pengyu, spokesman for the Chinese embassy in the US, said economic and trade cooperation between both countries is mutually beneficial. “No one will win a trade war or a tariff war,” he wrote in an X post.

The Foreign Ministry in Beijing said in a statement Tuesday that China has provided support to America’s fight against fentanyl which is “US’s problem,” though it stopped short of mentioning any planned trade retaliation.

Representatives for the Mexican Foreign Affairs Ministry and Economy Ministry, as well as China’s Commerce Ministry, didn’t immediately respond to requests to comment. Spokespeople for Trump didn’t immediately answer a question about whether there would be exemptions from the duties.

Trump campaigned on pledges to implement sweeping tariffs, vowing to hike tariffs to 60% for all goods imported from China and as high as 20% for those brought in from the rest of the world — policies he says will help pressure companies to re-shore manufacturing jobs in the US and raise revenue for the federal government.

President Joe Biden has already hiked tariffs on a variety of Chinese imports this year, including semiconductors, solar cells and critical minerals, with rates ranging from 25% for batteries to 100% for electric vehicles. The move was the culmination of a review of Trump’s tariff increases in his first term — none of which were rolled back.

While it was unclear how Trump’s 10% tariff threat on China fit in with his previous statements calling for even higher duties, analysts saw this as an opening gambit aimed at the drug problem.

China’s response

This “does not necessarily mean that Trump’s promised 60% tariffs on all Chinese imports are off the table,” said Neil Thomas, a fellow for Chinese politics at the Asia Society Policy Institute’s Center for China Analysis. “China will register its opposition and consider limited retaliation but is likely to respond cautiously at first to Trump’s threats, until it gets a better sense of the balance between confrontation and deal-making in his second term.”

While public health experts say fentanyl overdoses remain a major issue, provisional data released earlier this month by the Centers for Disease Control and Prevention showed a 14% drop in drug overdose deaths from June 2023 to June 2024. President Biden hailed US-China cooperation on counter-narcotics this month during a meeting with counterpart Xi Jinping in Peru.

Higher North American tariffs would upend the auto industry and other consumer sectors, including food, in which the three countries are highly integrated.

Mexico’s auto sector is particularly exposed to a trade conflict with the US, along with factories that export electronics, plastics and other manufactured goods to US consumers. Mexico became the US’s largest trading partner as China’s import share declined in recent years. The Mexican government estimates there’s now $800 billion annually in total trade between the nations.

‘Stir the debate’

The Canadian and US auto industries are so intertwined, and work on such thin profit margins, that a 25% tariff is “not a real conversation,” said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association, a Canadian industry group.

“The president-elect has done what he’s famous for, which is try to stir the debate. The only surprise is how early he’s done it,” Volpe said. “What we learned in the first term was he uses strong rhetoric, public rhetoric. But the negotiations are always tough, but reasonable — and I’m just telling everybody to be patient.”

A 25% tariff applied to all imports from Canada would put pressure on energy costs. Oil, gas and other energy products are Canada’s largest export to its southern neighbor; it’s by far the largest external supplier of crude to the US. Wilbur Ross, Trump’s former Commerce secretary, said earlier this month it would make no sense to place tariffs on Canadian energy.

The move on Mexico and Canada would reignite a trade feud that simmered across the continental bloc during Trump’s first term, where he forced a renegotiation of the North American Free Trade Agreement and imposed tariffs on certain sectors, including steel.

Currently, the re-branded trade pact, known as the United States-Mexico-Canada Agreement, allows for duty-free trade across a wide range of sectors. It’s not clear what recourse American importers, who would pay the duties, would have under the pact to head off any levy.

Beyond Bessent, Trump still has a number of top economic roles to fill in his administration. One of the chief architects of Trump’s tariff agenda, former United States Trade Representative Robert Lighthizer has yet to land a role in the second term.