A weekend of threats and negotiations later, US President Donald Trump’s tariff targets have mostly evaded the worst-case scenarios that made investors panic over the weekend and markets dive on Monday.
Trump delayed 25% tariffs on all Canadian and Mexican imports for a month following conversations with Mexican President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau. A 10% tariff on all imports from China, however, came into effect on 4 February.
After Trump announced he would apply the tariffs last Friday (31 January), Canada was quick to react and said it would impose its own set of 25% tariffs on more than $100bn (C$143.2bn) worth of US goods. Sheinbaum was expected to announce her retaliatory plans on Monday, but by that time she had already spoken with Trump and the pair had agreed on a 30-day delay. A similar deal with Trudeau followed soon after.
The agreements came with concessions from both sides. Sheinbaum said Mexico would send 10,000 National Guard troops to its border with the US to “prevent drug trafficking from Mexico to the United States”. In return, the US would take more action to prevent gun trafficking, which emboldens violent cartels, in Mexico. While Trump praised the deployment of the troops on social media, he did not mention anything about US efforts to tackle gun smuggling.
Trudeau announced on X that Canada would appoint a “fentanyl czar”, list Mexican cartels as terrorist groups and launch a “Canada-US Joint Strike Force to combat organized crime, fentanyl and money laundering”. Trudeau also highlighted his country’s $869mn border plan, which was announced last December.
China, on the other hand, did not enjoy the spoils of a last-minute deal and a 10% levy on Chinese imports into the US came into effect at midnight on 4 February.
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By GlobalData“China has not yet managed to avoid the tariffs because its initial response was different from Canada and Mexico’s,” Natixis Asia-Pacific chief economist Alicia-Garcia Herrero explains.
The North American countries decided to impose retaliatory tariffs on the US, while China just said it would bring the case to the World Trade Organization (WTO), constituting a “very weak response”. Herrero added that China “has only reacted to Trump 24 hours after Canada and Mexico”. This means that China is probably expecting the US to react in the same way to the extra pressure its applied now, she explained.
Minutes after the tariffs came into effect, China swiftly responded with its own set of measures, meant to take effect on 10 February. The measures target specific sectors and companies, giving the impression that Beijing is seeking to avoid escalating a full-on trade war.
The measures include a 15% levy on less than $5bn (36.25bn yuan) of US energy imports and a 10% charge on oil and agricultural equipment. China is also launching a probe into Google’s alleged antitrust practices; however, the service hasn’t operated in China since 2010.
“All of these retaliation measures could not happen very easily. For now, China just wants to see these tariffs put aside like it happened with Canada and Mexico. While saving face, very important. So they can tell its own domestic audience, if Canada can do it, we can do it,” Herrero emphasised.
The tariff yardstick
There has been much debate over whether Trump’s threat of high tariffs on some of his closest trade partners was a negotiating tactic. The events of the past few days could lead to multiple interpretations. It could be argued that the tariffs on the US’ regional neighbours would have been far too damning for all parties, making a deal the most likely outcome.
Stephen Buzdagan, a senior lecturer in international business at Manchester Metropolitan University, explained that the tariffs on Mexico, Canada and China would likely have led to “unintended consequences for the US by increasing the cost of inputs, decreasing the size of overseas markets and raising costs for US consumers, as the UK economy experienced post-Brexit”.
However, the quick and uncertain succession of events made investors and politicians feel that the threat was real, impacting market confidence and creating the expectation that the EU – and perhaps too the UK – would be next to face off with the US president. That said, the tariffs on China did come into effect, even if, at 10%, they were a far cry from the 60% he promised during his campaign.
While the immediate target of tariffs is the trade of goods and services, it can also affect foreign direct investment (FDI) flows.
Conor Finnegan, a consultant at the FDI Center, highlights that Trump’s “move underscores the need for strategic agility and stringent risk mitigation policies for companies navigating the increasingly fragmented global trade landscape. For IPAs [Investment Promotion Agencies], it will be crucial to help investors implement dual strategies to build geographically diversified supply chains and develop contingency plans for sudden policy shifts.”
Trade rerouting
Critics of trade barriers often suggest that they can lead to trade rerouting, rather than halting it altogether. The US and Canada, for example, have repeatedly alleged that Mexico is a “backdoor” to cheap illegal Chinese goods in North America. Economic consultancy TS Lombard’s chief China economist Rory Green highlighted that Mexico is the “third-largest transhipper of Chinese goods to the US behind only Vietnam and Thailand”.
There is some evidence that trade circumvention increased after Trump imposed tariffs during his first term. A Harvard University study suggests that the US-China trade war in 2017–18 did increase trade rerouting, although to different extents depending on how the phenomenon was measured. The study concluded that, in 2021, “16.1% of Vietnamese exports to the US were identified as product-level rerouting, while only 1.8% were flagged as firm-level rerouting, equivalent to $15.5bn and $1.7bn annually”.
Indeed, the appearance of Chinese AI company DeepSeek, which caused panic in the US given that the company allegedly developed comparable products for a fraction of the cost, could be attributed to trade rerouting. US officials are now investigating whether DeepSeek successfully avoided AI trade restrictions by purchasing NVIDIA chips through intermediaries in Singapore.
Even before Trump’s tariff plans, Covid-19 and the rise of geopolitical conflict had pushed businesses to focus on the resilience of their supply chains causing a rise in nearshoring. Therefore, even if he doesn’t apply the tariffs, increased uncertainty could still exacerbate this trend as businesses aim to increase their flexibility in the face of rapid policy shifts.
Investigations into China’s solar panel industry may also serve as a cautionary tale for proponents of trade barriers. In 2023, the US Commerce Department determined that certain Chinese producers were shipping their products through Cambodia, Malaysia, Thailand and/or Vietnam “for minor processing in an attempt to avoid paying anti-dumping and countervailing duties”.
When Trump announced tariffs against Mexico, he mentioned concerns about the supply chain and China. “So, there is a warning there that Trump will care about circumvention,” Herrero added.
“But we are not there yet. It is too early. Trump needs to start with the big issues. Fentanyl is a big issue in his campaign. China’s tariffs are a big issue. He started quite mildly, in my opinion, with 10% […] China has retaliated, but not from now, only from Monday,” she explained. She emphasised that China’s most important priority right now is halting the tariffs.
“China wants to show Trump is talking to China, not threatening China, which is what this call today will do,” Herrero said referencing Trump’s upcoming call with Chinese President Xi Jinping.
