Update tariffs – US, China, Mexico, Canada

Mexico and Canada get a reprieve

U.S. President Trump yesterday suspended the recently ordered tariff increase on imports from Mexico and Canada for 30 days after the Mexican and Canadian governments agreed to step up their fight against drug smuggling and illegal border crossings. Trump expressed satisfaction with the outcome. He said it remains to be seen whether a “final economic deal with Canada” can be structured during this time. They will also try to reach a deal with Mexico.

The fact that the wave of illegal immigration appears to be abating could also help to calm the situation in the short term. In the fourth quarter of 2024, U.S. Border Patrol reported 297 thousand apprehensions of illegal immigrants on the southwestern border, i.e., the border with Mexico. In the corresponding period of 2023, the figure was still 785 thousand. At the Canadian border, 39 thousand illegals were still being picked up, compared to 45 thousand in the 4th quarter of 2023.

China is not making a deal – yet

China has not yet entered into a deal with the US government, so the additional 10% tariffs imposed by Trump have taken effect. China has responded with countermeasures:

• Imports of coal and liquefied natural gas (LNG) from the US to China will be subject to an additional 15% tariff.
• China will raise tariffs by 10% on crude oil, agricultural machinery, and large cars and pickup trucks
• China will also investigate into a bellwether US tech company for suspected violation of its anti-monopoly. But this step is largely symbolic as that company has minimal operations in China due to censorship issue.
• The Chinese authorities also announced a list of new export controls including tungsten-related materials, typically used in industrial and defense applications, as well as materials linked to tellurium, which can be used to make solar cells.

These additional tariffs will take effect on February 10. However, the affected trade volume is limited. For example, the U.S. exported $6.4 billion of crude oil to China in the 12 months through November 2020. LNG exports totaled $1.6 billion. Overall, the affected goods volume is likely to be around $10 to $15 billion. The goods affected is equivalent to about 13% of Chinese imports from the US or less than 1% of China's total imports, according to UN Comtrade based on 2023 data. Hence, the impact on China’s economy should be rather muted.

This also confirms our view that China would respond in a restrained manner because the Chinese authorities want to avoid setting off a tit-for-tat trade war with the US, at a time when the Chinese leadership urgently need to focus on China’s domestic economic problems (see our latest Economic Briefing on China – Trump’s 10% tariff ). But depending on the next steps taken by the US, it is possible that China could take a more aggressive approach later on.

For full text see attached PDF-Version.