By David Lawder, Andrea Shalal and Jarrett Renshaw
(Reuters) -U.S. President Donald Trump is expected to sign an order on Saturday imposing hefty new tariffs of 25% on goods from Mexico and Canada and 10% on imports from China, threatening to ignite a trade war that could disrupt more than $2.1 trillion of annual trade.
Trump, who is at his Mar-a-Lago estate in Florida this weekend and spent the morning golfing, said on Friday that there was little that the top three U.S. trading partners could do to forestall the tariffs. On Saturday, a source familiar with the matter said the U.S. had formally informed Canada that tariffs would be imposed.
Trump set the Feb. 1 deadline to press for strong action to halt the flow of the opiate fentanyl and precursor chemicals into the U.S. from China via Mexico and Canada, as well as to stop illegal immigrants crossing U.S. borders.
Just 12 days into his second term, Trump is upending the norms of how the United States is governed and interacts with its neighbors and wider world. On Friday, he pledged to proceed with the levies despite acknowledging they could cause disruption and hardship for American households.
A model gauging the economic impact of Trump’s tariff plan from EY Chief Economist Greg Daco suggests it would reduce U.S. growth by 1.5 percentage points this year, throw Canada and Mexico into recession and usher in “stagflation” at home.
“We have stressed that steep tariff increases against U.S. trading partners could create a stagflationary shock – a negative economic hit combined with an inflationary impulse – while also triggering financial market volatility,” Daco wrote on Saturday.
That volatility was evident on Friday, when the Mexican peso and Canadian dollar both slumped after Trump vowed to fulfil his threats. U.S. stock prices also fell and Treasury bond yields rose.
Until now, the prevailing assumption among investors, economists and the business community was that Trump had been floating the tariff threats to provide an impetus for negotiations and that he would ultimately hold off or start more slowly. But during a lengthy White House exchange with reporters on Friday, Trump brushed aside the notion that his threats were merely bargaining tools:
“No, it’s not … we have big (trade) deficits with, as you know, with all three of them.”
He also said revenue was a factor and the tariffs may be increased, adding: “But it’s a lot of money coming to the United States.”
Trump did, however, mention a potential carve-out for oil from Canada, saying that tariff rate would be 10%. But he indicated that wider tariffs on oil and natural gas would be coming in mid-February, remarks that sent oil prices higher.
At nearly $100 billion in 2023, imports of crude oil accounted for roughly a quarter of all U.S. imports from Canada, according to U.S. Census Bureau data.
HIGHER COSTS
Trump acknowledged that higher costs could be passed on to consumers and that his actions may cause short-term disruptions, but said he was not concerned about their impact on financial markets.
Jake Colvin, president of the National Foreign Trade Council, which represents major U.S. companies, said imposing tariffs on key trading partners “could impact the cost and availability of everything from avocados to air conditioners to cars and risks shifting the focus of our relationships away from constructive dialogue.”
Although Trump speaks of “charging” other nations for tariffs, they are paid by importing companies, and sometimes passed on to consumers.
Automakers would be particularly hard hit, through tariffs on vehicles assembled in Canada and Mexico. Their vast regional supply chain, where components can cross borders several times before final assembly, would further exacerbate these costs.
And Trump said import taxes were also being considered on European goods, as well as on steel, aluminum and copper, and on drugs and semiconductors.
White House spokesperson Karoline Leavitt said the tariffs would be implemented immediately, and details would be published on Saturday. It typically takes weeks for tariffs to take practical effect.
RETALIATION EXPECTED
Trump’s move is expected to draw retaliatory tariffs, potentially disrupting more than $2.1 trillion in annual two-way U.S. trade with its top three trading partners.
Canada has drawn up detailed targets for immediate retaliation, including duties on Florida orange juice, a source familiar with the plan said.
Its broader list of targets could cover C$150 billion ($103 billion) worth of U.S. imports, but it will hold public consultations before acting, the source said.
Mexican President Claudia Sheinbaum has also threatened retaliation, but said she would “wait with a cool head” for Trump’s decision and was prepared to continue a border dialogue with him.
China has been more circumspect, but vowed to defend its trade interests.
A spokesperson for Beijing’s embassy in Washington said: “There is no winner in a trade war or tariff war, which serves the interests of neither side nor the world.”
($1 = 1.4524 Canadian dollars)
(Reporting by Jarrett Renshaw in Palm Beach and David Lawder and Andrea Shalal in Washington; Editing by Dan Burns, Himani Sarkar, Kevin Liffey and Diane Craft)
