U.S. President Donald Trump announced a one-month suspension of new tariffs on Mexico after the country agreed to deploy 10,000 National Guard members to its northern border to combat the influx of illegal drugs, particularly fentanyl. This information was shared by Trump on social media on Monday.
Mexican President Claudia Sheinbaum noted that the agreement also entails a commitment from the U.S. to take measures against the trafficking of high-powered weapons into Mexico. The two leaders had a phone conversation on Monday, just hours before the scheduled implementation of tariffs on Mexico, China, and Canada.
During this month-long pause, the two nations will engage in further discussions, according to Trump. The announcement of potential tariffs had caused a decline in U.S. stocks and other global financial markets, with world leaders reacting to Trump’s threats of extending tariffs to the European Union as well.
The S&P 500 index dropped 1.7% at the market’s opening, following significant losses in Asian and European markets due to concerns over a potentially damaging trade war.
On Monday, Trump mentioned that he had spoken with Canadian Prime Minister Justin Trudeau and planned to have another conversation at 3 p.m. ET (2000 GMT). Both Canada and Mexico had indicated they would impose retaliatory tariffs. The tariffs on Canada and China are still set to take effect on Tuesday.
After returning from his Mar-a-Lago estate, Trump suggested that the European Union, comprising 27 nations, could be the next target for tariffs, although he did not specify a timeline.
“They don’t take our cars, they don’t take our farm products. They take almost nothing and we take everything from them,” he stated to reporters. In response, EU leaders at an informal summit in Brussels on Monday expressed their readiness to retaliate if the U.S. imposes tariffs, while also advocating for dialogue and reason. French President Emmanuel Macron emphasized that if the EU’s commercial interests were threatened, it would need to “make itself respected and thus react.”
Chancellor Olaf Scholz of Germany indicated that the European Union could implement its own tariffs against the United States if necessary, but emphasized the importance of reaching a trade agreement between the two parties. Former President Trump suggested that the United Kingdom, which exited the EU in 2020, might avoid tariffs, stating, “I think that one can be worked out.” The United States remains the EU’s largest partner in trade and investment. Eurostat data from 2023 reveals that the U.S. had a trade deficit of 155.8 billion euros ($161.6 billion) with the EU in goods, which was counterbalanced by a surplus of 104 billion euros in services. EU foreign policy chief Kaja Kallas remarked that a trade war would yield no winners, warning that if such a conflict arose between Europe and the U.S., “then the one laughing on the side is China.”
MARKETS REACT NEGATIVELY
Economists warn that the Republican president’s proposal to impose 25% tariffs on Canada and Mexico, along with 10% tariffs on China, could hinder global economic growth and increase prices for American consumers. Trump argues that these measures are essential to combat immigration and drug trafficking while promoting domestic industries. The financial markets reacted negatively on Monday, reflecting apprehensions about the potential consequences of a trade war. In Tokyo, shares fell nearly 3%, while Australia’s benchmark, often seen as a barometer for Chinese markets, declined by 1.8%. The mainland Chinese market was closed for the Lunar New Year holidays. By midday in Europe, Germany’s DAX index had dropped 1.8%, France’s CAC was down 1.9%, and Britain’s FTSE 100 fell by 1.5%.
The Chinese yuan, Canadian dollar, and Mexican peso all experienced declines against a rapidly strengthening dollar. As Canada and Mexico are the primary suppliers of crude oil to the U.S., oil prices surged by over 1%, while gasoline futures increased by nearly 3%.
According to ING analysts, Trump’s tariffs would encompass nearly half of all U.S. imports, necessitating a more than twofold increase in domestic manufacturing to fill the void—an impractical endeavor in the short term. Other experts warned that these tariffs could push Canada and Mexico into recession and lead to “stagflation,” characterized by high inflation, stagnant economic growth, and rising unemployment domestically.
In Europe, economists from Deutsche Bank indicated that they are currently estimating a 0.5% reduction in gross domestic product (GDP) if Trump were to implement 10% tariffs on the region.
NATIONAL EMERGENCY
A fact sheet from the White House did not specify what actions Canada, Mexico, and China would need to undertake to receive a reprieve. Trump has pledged to maintain the sanctions until he deems the national emergency concerning fentanyl, a potent opioid, and illegal immigration to the U.S. is resolved.
China has labeled fentanyl as an American issue and announced plans to contest the tariffs at the World Trade Organization, while also indicating a willingness to engage in discussions. Canada has stated its intention to pursue legal action through appropriate international channels to challenge the tariffs.
Automakers are expected to face significant challenges due to the introduction of new tariffs on vehicles manufactured in Canada and Mexico, which will strain an extensive regional supply chain where components often cross borders multiple times prior to final assembly.
Shares of Ford and General Motors declined by approximately 4% to 5%. In European markets on Monday, shares of Volkswagen, BMW, Porsche, Stellantis, and Daimler Truck experienced a drop of around 5-6%. Analysts from investment bank Stifel projected that tariffs could affect Volkswagen’s revenues by 8 billion euros and Stellantis’s by 16 billion euros.
