Canada, China, and Mexico are among the top trading partners of the US. However, a recent announcement by the US President is anticipated to redefine the now-set structure of global trade practices. The US president is considering imposing a 10% tariff on imports of goods manufactured in China, effective 1st February 2025, explaining the country is sending fentanyl to Mexico and Canada. Trump further promised to increase tariff rates by 60% on Chinese goods. The announcement followed the warnings to Mexico and Canada, for the levy of import duty of 25%, subject to the entry of undocumented migrants and drugs within the US borders, by the states.
Mexican Transnational Criminal Organizations (TCOs) are anticipated to manufacture illicit fentanyl in Mexico, using pill presses, often imported from China, to lace counterfeit medication, including veterinary medication, with fentanyl or methamphetamine. The medicines are reportedly sold in pharmacies along the US-Mexico border and touristic regions. The same is inviting heavy tariffs on the states.
Fentanyl overdose is a leading cause of mortality for Americans aged 18-45. The addictive drug is reasoned for about 70% of the 107,000+ drug overdose fatalities in the US, in 2022. The US government seized 115,562,603 illicit fentanyl pills from the market, in 2023. The US customs agents seized just 43 pounds of fentanyl at the Canadian border last fiscal year, compared with 21,100 pounds at the Mexican border.
In 2024, the Canada Border Service Agency (CBSA) oversaw a daily flow of about 400,000 people and billions of dollars in goods and services crossing the land border between Canada and the US. From January 1 to October 31, 2024, CBSA seized over 25,600 kg of illegal drugs (both inbound and outbound), 5,000 kilograms of cannabis, and 547,000 kg of undeclared tobacco. The drugs included 4.9 kg of fentanyl, an increase of 775% from 2023. The regulatory body issued around 1,686 penalties totaling $2,150,800 for food, plant and animal import violations.
In response to the US tariff hike, the three countries promised necessary retaliations. Chinese officials raised concerns against protectionism at the World Economic Forum in Davos. China's Ministry of Commerce warns the US about the potential negative implications of the tariff hikes on bilateral cooperation. In an attempt to retaliate against the rising tariffs on Chinese EVs, the country is considering raising the temporary tariff rate on imported cars with engines larger than 2.5 liters. The country has additionally responded to the US request for verifying clues on certain cases of manufacturing of illegal drugs - including fentanyl and taken action. Currently, the two countries sell to each other is subject to tariffs - 66.4% of US imports from China and 58.3% of Chinese imports from the US.
Mexico President Claudia Sheinbaum stressed the free trade agreement of the US with Mexico and Canada during Trump’s first term. The formal revision of the agreement is scheduled for July 2026. In an attempt to do away with the alleged contingencies, the President shared the national immigration strategy of Mexico with Trump while emphasizing respecting human rights. The immigrant activity on the US-Mexico border has additionally been checked by setting up new checkpoints and increasing patrols. Furthermore, the country rolled out significant seizures of fentanyl.
Canadian Prime Minister chose to fight back, preparing counter-tariffs in response to the threat. Furthermore, the Canadian President additionally decided to cut ties with Mexico and suggested the state to remain a trade partner with the US, as Canada explores other options.
Douglas Robert Ford, a Canadian politician and businessman warned the US about the pull down of all American-made alcohol from the market, provided the tariffs roll out. The US exported distilled spirit worth $262.1 million to Canada and $139 million to Mexico, in 2023. Additionally, the US is the fourth largest exporter of hard liquor. Canada is a major importer of the US, with total imports worth $320 million, in 2022. The US imported hard liquor worth $493 million from Canada, in 2022. Thus, the discontinuance of the US liquor in Canada will expand the trade deficit for the US. Ford further added Canada would impose dollar-for-dollar tariff retaliation on American goods entering Canada.
However, Smith, the premier of Canada's oil-rich province of Alberta, emphasized the trade war would be more devastating for the Canadian economy, as the US economy is 13 times the Canadian economy. The GDP at current prices is $2.3 thousand billion, as against $30.3 thousand billion for the US.
Canada is the largest single source of the US total petroleum and crude oil imports. In 2022, 52% of the US gross total petroleum imports and 60% of gross crude oil imports were sourced from Canada. Mexico follows in the hierarchy owing 10% of the petroleum and crude oil imports for the US. Furthermore, Mexico, Canada, and China are the top three export destinations for petroleum in the US, with 12%, 9%, and 7% share respectively. Canada is the third largest importer (9%) of the US crude oil. Thus, the potential trade conflict arising from the tariff policies will benefit the rise of Saudi Arabia, Iraq, Colombia, and Singapore, among others.
Moreover, Canada and Mexico are among the fastest growing export markets for cars of the US accounting for $2.9 billion and $606 million of market share, respectively. China imports car worth $5.7 billion from the US. Additionally, Mexico and Canada were among the fastest growing import markets for cars in the US with $7.3 billion and $3.8 billion market share respectively. Hence, the stipulated trade war would witness the rise of Germany, South Korea, United Arab Emirates, Japan, and others in the US automotive landscape.
The US is the largest exporter of mineral products will total exports valued at $427 billion in 2022. The primary destinations for exports from the US include Mexico, and Canada- importing products worth $58.3 billion and $38.3 billion respectively. The expected tariff conflict will result in the rise of the Netherlands, the UK, and South Korea as major importers. The US ranks second in terms of mineral products imports globally, with $329 billion in imports in 2022. The major mineral products exporters to the US include Canada and Mexico, exporting products worth $166 billion and $27.5 respectively. The fall of the two in the exporters list will mark a rise in Saudi Arabia, Iraq, and Colombia.
The US exports semiconductor devices majorly to Mexico ($1.0 billion), and China ($749 million). China is additionally among the major exporters of chips to the US, amounting to $962 million. The global semiconductor sales are anticipated to reach $1 trillion by 2030. The US captures the largest share of the market value of the semiconductor industry however, the manufacturing is concentrated in four Asian economies—South Korea, Taiwan, China, and Japan. Furthermore, the US ranks the highest in terms of semiconductor sales (25%), followed by China (24%).
The potential trade war will mark the rise of Malaysia, Hong Kong, Germany, Vietnam, Thailand, and South Korea, in the US market. Furthermore, India is emerging as the chip manufacturing hub, and the strong India-US ties, are presenting significant opportunity for Indian chips in the US market. The Indian semiconductor industry is propelling owing to government initiatives and market players’ contribution.
The Indian Government launched the Semicon India Programme, in 2021, investing $9.2 billion, to fuel the semiconductor and display manufacturing ecosystems in the country. In 2024, the interim Union Budget raised the allocation to $833.7 million. The revised estimate of expenditure on Modified Programme for Development of Semiconductors and Display Manufacturing Ecosystem, reached $181.5 million, in FY24.
Furthermore, major market player Micron Technology invested $2.8 billion, to develop an assembly and test facility in Gujarat. Additionally, Foxconn will invest $600 million in India, for a phone-making project, and a semiconductor equipment facility. Moreover, Vedanta partnered with Foxconn to apply for chip fab.
In a nutshell, tariffs are crucial to Trump's economic plans, to boost growth, protect jobs and raise tax revenue. However, the stringent tariff policies could lead to higher prices in the US and companies would be hit by foreign retaliation. The increased tariffs if rolled out will result in a trade war, disturbing the global economy. The impact of the same would lead to a rise in prices of goods and services, however, it will present significant growth opportunities to developing economies. Encapsulating, the global trade landscape is currently on the verge of substantial restructuring.