What are tariffs, why is Trump using them, and will prices rise?

U.S. President Donald Trump imposed new tariffs on imports from Mexico and Canada and doubled his recent tariffs on goods from China. These moves are designed to reshape America's trade relationships and could have broad implications for the global economy.

However, the day after these tariffs took effect, Trump announced a one-month exemption for American automakers, who were expected to be heavily impacted. This followed his earlier announcement of tariffs on all steel and aluminum imports. These policy shifts demonstrate the uncertainty surrounding trade policy and the impact on specific industries.

In response, Canada and China have also imposed tariffs on American goods, raising concerns about a global trade war and rising prices. These tit-for-tat tariff measures could disrupt global supply chains and increase the burden on consumers.

A tariff is a tax imposed on goods imported from other countries. Companies that ship foreign goods into the country pay the tariff to the government. Typically, tariffs are a percentage of the product's value. A 20% tariff on Chinese goods means a product worth $10 (£7.76) would incur an additional $2 charge. Businesses can choose to pass on some or all of the tariff costs to consumers.

The Trump administration has stated that tariffs will promote American manufacturing, protect jobs, increase tax revenue, and boost economic growth. Furthermore, the White House also claims that these tariffs are intended to hold countries accountable for failing to stop illegal immigration and the flow of fentanyl and other drugs into the United States. Fentanyl is linked to tens of thousands of overdose deaths in the U.S. each year.

Regarding tariffs targeting China, initially a 10% tariff on all goods imported from China began on February 4th. Later, Trump stated that goods valued under $800 would be exempt. In response, China implemented its own tariffs on February 10th, including a 10-15% tax on certain U.S. agricultural products. Beijing also placed several U.S. aerospace, defense, and technology companies on an "unreliable entities list" and imposed export controls. On March 4th, the 10% tariff was doubled to 20%. China urged the U.S. to resume dialogue with Beijing as soon as possible. "If the U.S. ... insists on waging a tariff war, a trade war, or any other form of war, China will see it through to the end," warned Chinese Foreign Ministry spokesperson Lin Jian.

Concerning tariffs on Canada, Trump imposed a 25% tariff on goods from U.S. neighbors Canada and Mexico. These tariffs were originally scheduled to take effect on February 4th, but ultimately began on March 4th. Meanwhile, Canadian energy imports face a 10% tariff. Canadian Prime Minister Justin Trudeau criticized the tariffs as "a profoundly stupid move" and accused Trump of planning to "utterly destroy the Canadian economy because it would be easier to annex us." He stated that Canada would immediately impose tariffs on $30 billion CAD worth of American imports and tariffs on $125 billion CAD worth of goods within 21 days. Canada may also restrict U.S. access to its energy. It is the largest supplier of oil to the U.S. and provides 30% of states with electricity. Ontario Premier Doug Ford said he would impose a 25% surcharge on Canada's electricity exports to three U.S. states (Michigan, New York, and Minnesota). He also said he would consider cutting those states off from Canadian power entirely if the U.S. tariffs escalate.

Mexico also delayed retaliatory tariffs on U.S. goods. Mexican President Claudia Sheinbaum agreed to send 10,000 National Guard troops to the U.S.-Mexico border to "prevent the trafficking of drugs, especially fentanyl." She said the U.S., in turn, has agreed to step up measures to prevent the smuggling of high-powered American weapons into Mexico. Sheinbaum said after Trump's tariffs took effect on March 4th that the U.S. decision to proceed with the 25% tariffs "makes no sense," adding that Mexico expects respect from its northern neighbor. She added that Mexico will take "tariff and non-tariff measures" in response, promising to release more details on March 9th.

The one-month tariff exemption applies to cars manufactured in North America that comply with the continent's existing free trade agreement. This agreement, negotiated by Trump during his first presidential term, stipulates rules for what percentage of a car must be made in each country to qualify for duty-free treatment. The tariffs on Canada and Mexico have raised concerns about a significant impact on the automotive manufacturing industry. Parts often cross the border multiple times between the U.S., Mexico, and Canada before being fully assembled into a car. Financial analysts at TD Economics said the average price of an American car could rise by $3,000 due to the import taxes. Following the announcement, Ford's stock price rose by more than 5% and GM's stock price rose by more than 7%.

Trump said the 25% tariffs on steel and aluminum would take effect on March 12th, without exceptions. The United States is the world's largest importer of steel, with Canada, Brazil, and Mexico being its top three suppliers. Canada also provided more than 50% of U.S. aluminum imports in 2024. American companies that use steel and aluminum to manufacture products warned that the tariffs could drive up their prices. The Canadian government said the tariffs were "entirely unacceptable" and vowed to retaliate swiftly. Trump previously announced 25% tariffs on steel and 15% tariffs on aluminum during his first presidential term in 2018. However, he later reached exemption agreements with numerous countries, including Australia, Canada, and Mexico. Despite the exemptions, the tariffs increased the average price of American steel and aluminum by 2.4% and 1.6%, respectively, according to the U.S. International Trade Commission.

All Chinese goods valued at over $800 are included in the tariffs. All steel imports from around the world face a 25% tax. Mexican and Canadian goods will also face a 25% tariff. Canadian energy exports added a 10% tariff. Mexican goods that could be affected include fruits, vegetables, spirits, and beer. In addition to steel, Canadian goods such as lumber, grains, and potatoes could also become more expensive. Increased costs for Canadian oil and electricity could push up prices across the board. Official statistics show that U.S. tariffs on imported washing machines between 2018 and 2023 increased the price of laundry equipment by 34%. Prices fell after the tariffs expired. The Federal Reserve Bank of Atlanta estimates that the tariffs on Mexico and Canada, coupled with the 10% increase on Chinese goods, could increase the price of everyday purchases by 0.81% to 1.63%. Some experts believe Trump's new round of tariffs could trigger a wider trade war, potentially driving up prices more generally. Capitol Economics said the U.S. annual inflation rate could rise from 2.9% to as high as 4%.

Trump previously told the BBC that the UK was "out of line" but hinted that a "solution can be worked out." The UK exports pharmaceuticals, cars, and scientific instruments to the U.S. UK Business Secretary Jonathan Reynolds said the UK should be exempt from the tariffs because it buys more from the U.S. than it sells there. Trade Minister Douglas Alexander pledged a "calm and level-headed" response while addressing Parliament after the steel and aluminum tariffs were announced. During a cabinet meeting on February 26th, Trump said he would be announcing sanctions on EU goods "very soon." "Overall, it will be 25%, and it will be on cars and everything else," he added. In 2024, the U.S. trade deficit with the EU was $213 billion, which Trump previously called an "atrocity." In response, the European Commission said it would "react firmly and immediately against unjustified tariffs." U.S. companies Harley-Davidson and Jack Daniel's have previously faced EU tariffs.