Trump imposes 25% tariffs on Canada and Mexico, and 20% tariffs on China, escalating trade war

Story updated 5 March to include commentary

US president Donald Trump has imposed his previously threatened 25% tariffs against Canadian and Mexican imports, as well as a further 10% tariff on China (on top of an earlier 10% increase on tariffs on China).

Already, Canada and China have retaliated against the tariffs. Canada has vowed to impose 25% tariffs against $107 billion worth of US goods, while China has announced 10-15% tariffs on US imports. Mexico has not yet responded to the tariffs, but its president Claudia Sheinbaum previously promised to retaliate. 

Read more: Trump’s tariff timeline

The confirmation of the tariffs being impose is likely to throw the automotive supply chain into chaos. The sector will face massive cost increases as both finished vehicles and parts will be taxed, with the 25% tariffs Trump threatened on steel and aluminium parts. On top of this, components cross the US-Mexico border multiple times before they get installed in a vehicle.

“One-third of North American production could be disrupted within one week” - S&P Global Mobility Tariff Analysis

It is unclear whether production will halt while OEMs reassess logistics flows. A rapid response special report by S&P Global Mobility found that there is a 70% probability of a quick resolution now that the tariffs have been deployed, in which case tariffs would only be in effect for up to two weeks. The report said that some automaker production would be expected to be lost due to supply issues and border gridlock, as well as expected short-term OEM production halts. The company estimated that one-third of production could be disrupted in the region within one week, equating to disruption of more than 20,000 units per day. In this scenario, S&P said it would expect all lost sales production is regained in short order.

The probability of extended disruption was calculated by S&P to be 20%, if tariffs are held in place for six to eight weeks. In this case, it is expected that several high exposure vehicles slow or cease production, leaving OEMs forced to conserve inventory and be careful to replenish with ‘tariffed’ stock.

“[We see] potential for North American production to be impacted by as much as 20,000 units per day within a week” - S&P Global Mobility Tariff Analysis

OEMs could have product development delays during this period, having a knock-on effect into future years. However, in the case of a six-to-eight-week disruption, it is expect most sales and production are compensated for within 12 months. 

The worst case scenario would be a ‘Tariff Winter’, which S&P puts at a 10% probability. If the tariffs are integrated long-term into the automotive supply chain, it would “create an environment of sub-optimal sourcing”, the report said. This could cause North American ligh-vehicle sales to decline by 10% for several years with a long-term decline in competitiveness of around 10% in the US, 8% in Mexico and 15% in Canada. 

Michael Tamvakis, professor of Commodity Economics and Finance at Bayes Business School, City St George’s University of London, said that the car makers which will be hurt most by the tariffs are US companies that use Canada and Mexico for part of their supply chain.

“If US car manufacturers are hit by lower sales because of new tariffs, are they likely to have the spare cash to invest in US facilities? In a parallel development, Apple has announced their plan to reshore the production of some of their proprietary chips and hardware, but they have substantial amounts of cash to undertake this investment, which car manufacturers may not be able to generate,” Tamvakis said. “If Mexico imposes retaliatory tariffs, Mexican inflation is likely to run away, exacerbating the vicious cycle of an already poor situation by curtailing growth or plunging the economy into recession. One can envisage a similar situation for Canada.”

We will update this story as more information becomes available…