On Feb. 1, 2025, the White House announced a new round of tariffs on imports from Mexico, Canada, and China, aimed at addressing the flow of illicit drugs and illegal immigrants, unfair trade practices, and the need to protect American industries.
The new tariffs include a 25 percent tariff on select imports from Mexico and Canada, covering automobiles, steel, aluminum, and agricultural products. While Mexico and Canada have enjoyed zero tariffs under the United States-Mexico-Canada Agreement (USMCA), these new tariffs override that provision. Some exceptions may be negotiated, particularly for industries with deep supply chain dependencies. (RELATED: Use Timber Tariffs to Leverage Policy Changes)
In addition, an extra 10 percent tariff will be applied to all Chinese imports, affecting a wide range of goods, including electronics, semiconductors, textiles, and consumer products. This is in addition to the existing tariffs imposed during the original U.S.–China trade war under Trump’s first term, which averaged about 14 percent, bringing total tariff rates to 24 percent or more.
The world panicked. Numerous media outlets ran sensational headlines about the new tariffs. For example, the Wall Street Journal used titles such as “Tariffs… Spooked Almost Everyone.”
Former U.S. Treasury Secretary Larry Summers, who served under President Bill Clinton, described Trump’s decision as a “self-inflicted supply shock.” Senator Rand Paul, a Republican from Kentucky, warned that taxing trade would reduce trade activity and drive up prices. Jay Timmons, the leader of the National Association of Manufacturers, claimed, “The ripple effects will be severe.”
But after these initial (over)reactions, we should analyze Trump’s new tariffs with a cool head and the facts.
From a pure free-market economic perspective, tariffs are a government intervention that distorts markets and hurts both producers and consumers. But Trump is looking beyond economics — he sees tariffs as an effective tool for U.S. international policy and national security. His major goal with these new tariffs is to wage a more effective war on drugs and counter China’s large-scale adverse influence. (RELATED: To Secure the Panama Canal, Reinstitute the Monroe Doctrine)
China is the primary source of fentanyl, and the Chinese Communist Party (CCP) strategically uses China’s fentanyl production as a leverage point against the U.S. The CCP views the U.S. as its most important enemy. While direct military confrontation is costly, asymmetric tactics — such as economic and social destabilization — offer a low-cost, high-impact alternative. (RELATED: Is Fentanyl China’s Payback to the West for the Opium Wars?)
Fentanyl, which has fueled America’s opioid crisis, weakens U.S. society by increasing crime and social instability, overburdening healthcare and law enforcement resources, and causing economic loss due to addiction-related workforce issues. From this perspective, allowing fentanyl precursors to flow into the U.S. indirectly serves Beijing’s interests by contributing to internal American decay — without triggering open war.
Mexico, meanwhile, has little incentive to fully stop the flow of drugs to the U.S. Corruption is rampant, and the government lacks full control over the cartels. Many politicians, police, and businesses benefit from cartel money. Past crackdowns have often backfired, escalating violence rather than containing it. Mexico also uses the cartels as a bargaining chip in U.S. relations. (RELATED: Mexico’s Efforts to Capture Fentanyl Plummet, Sparking U.S. Concern)
As for Canada, U.S. grievances extend beyond trade imbalances and unfair policies. The U.S. is also concerned about drugs and illegal immigration flowing in from Canada. But more significantly, Canada has allowed large-scale Chinese infiltration, including election meddling, bribery, espionage, intimidation of Chinese-Canadian communities, information warfare, and even the establishment of illegal Chinese police stations. In some ways, Canada has become a de facto Chinese province.
Diplomatic complaints, as used by past administrations, have achieved little, and a “hot war” would be costly and deadly — neither an effective nor efficient option. From this perspective, imposing or removing tariffs is an effective, efficient, fast, and flexible tool, especially for a large country such as the U.S., because of its large market, affluent consumers, and relatively smaller exposure to trade.
The U.S. economy is far less reliant on trade than those of Mexico, Canada, or China. Trade as a percentage of GDP for Mexico is 83 percent, for Canada 66 percent, for China 37 percent, while for the U.S., it is only 25 percent. These countries also rely on trade with the U.S. far more than the U.S. relies on them. Seventy-eight percent of Mexico’s total trade is with the U.S., whereas only 15 percent of U.S. trade is with Mexico. In a trade war, they suffer more than the U.S. does, making tariffs a more effective tool for the U.S. against these countries.
Despite the headlines, the economic impact of tariffs is relatively small. In recent years, U.S. tariff revenues have averaged just 0.3 percent of GDP. Trump’s new tariffs could bring in an additional 1 percent of GDP — still a small fraction of the overall economy. The Tax Policy Center projects that by 2026, the average U.S. household’s after-tax income will decline by 1 percent, a reduction of about $930 per year if the new tariffs are fully implemented. Goldman Sachs economists estimate that tariffs on Canada and Mexico could increase consumer prices by 0.7 percent.
Furthermore, there are mitigation factors. First, tax cuts, as promised by Trump, will offset some of the price increases. In addition, global supply chains have adapted, reducing dependency on single-country imports. Many U.S. companies have already shifted supply sources, which helps cushion the impact of potential price increases. Growth in U.S.-based manufacturing is also playing a role in buffering against higher import costs, ensuring that domestic production can absorb some of the shocks.
In sum, the effect is small, and people shouldn’t panic. But the fact that the world is panicking only highlights how effective this strategy is — which is likely what Trump intended. And, indeed, the strategy already seems to be working: leaders from all three countries have either made or are in the process of making deals with the U.S.
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Shaomin Li is a professor of international business at Old Dominion University’s Strome College of Business.