US Pauses Tariffs on Mexico and Canada but Moves Forward with Levies on Chinese Imports

On February 3, 2025, the United States (US) President Donald Trump announced a 30-day suspension of the planned 25% tariffs on imports from Mexico and Canada after securing commitments from both nations to enhance border security measures and combat organized crime. This delay allows time for further negotiations, potentially paving the way for revised trade agreements with the US’ two largest trading partners.

Despite the temporary reprieve for North American imports, the administration proceeded with a 10% tariff on Chinese imports, which took effect on February 4, 2025. In response, China filed a complaint with the World Trade Organization (WTO), contesting the legality of the tariffs and citing concerns over protectionist trade practices. Beijing has also hinted at possible retaliatory measures, which could include restrictions on US agricultural imports and higher tariffs on American-manufactured goods.

Figure 1: Proposed Tariffs

Impact on North American and Global Supply Chains

US farmers have expressed concern over potential retaliatory measures from China, which remains a major importer of soybeans, corn, and beef. China has historically used agricultural tariffs as a bargaining tool in trade disputes, and any reduction in demand from Chinese buyers could depress US farmgate prices, exacerbating an already volatile commodity market. Meanwhile, Mexico and Canada’s agricultural sectors are monitoring developments closely, as tariff uncertainty could influence the cross-border trade of fruits, vegetables, and livestock products.

Economic and Inflationary Pressures

New tariffs could reignite inflationary pressures, particularly in sectors that rely heavily on imported goods. The Federal Reserve has indicated that it is closely watching the situation, with officials warning that higher import costs could complicate monetary policy decisions. Should inflation spike due to increased production costs or supply chain disruptions, the Federal Reserve may be forced to reassess its interest rate strategy, potentially delaying any anticipated rate cuts.

For US consumers, tariffs on Chinese goods could lead to higher retail prices on a wide range of products, such as fruits, vegetables, spices, and tea. Businesses that rely on Chinese-manufactured components may pass additional costs onto consumers, further tightening household budgets at a time when economic growth remains fragile.

Figure 2: President Donald Trump shakes hands with China's President Xi Jinping at the Great Hall of the People in Beijing

Market Outlook: Trade Uncertainty Weighs on Economic Forecasts

The short-term market outlook remains uncertain, with trade disputes introducing volatility across multiple industries. Should negotiations with Mexico and Canada fail to yield a long-term resolution, businesses may begin to diversify sourcing strategies to reduce reliance on North American supply chains. Meanwhile, China's response will be closely watched, as retaliatory tariffs on US exports could create further disruptions in commodity markets.

Key Developments to Watch

One of the most pressing developments to monitor in the coming weeks is whether the US will extend the 30-day tariff suspension on imports from Mexico and Canada. If trade negotiations between the three countries make meaningful progress, there is a possibility that the US administration will either further delay or completely withdraw the proposed 25% tariffs. However, if discussions stall, businesses reliant on North American supply chains may need to make strategic adjustments, such as securing alternative suppliers or increasing inventory levels to mitigate potential disruptions.

Another critical factor shaping global trade dynamics is China’s response to the tariffs, particularly in the agricultural sector. In previous trade disputes, Beijing has imposed steep tariffs on American soybeans, pork, and dairy products, significantly reducing US export volumes to China. Should China take similar action in retaliation for the new 10% tariffs, US farmers could face declining commodity prices and reduced export opportunities, further exacerbating financial strain in the agricultural sector. Additionally, China may explore trade agreements with other agricultural-exporting nations such as Brazil and Argentina, effectively diverting demand away from the US market.

A third major area of concern is the potential impact of tariffs on inflation and consumer prices in the US. Since many consumer electronics, household goods, and textiles are sourced from China, the new tariffs could increase costs for retailers and manufacturers, ultimately resulting in higher prices for American consumers. This development is particularly significant given ongoing inflationary pressures in the US economy, as it could influence Federal Reserve policy regarding interest rates. If inflation rises due to higher import costs, the Fed may be forced to delay interest rate cuts, affecting business investment and consumer spending.

Beyond North America and China, global markets will also be closely watching how supply chains evolve in response to ongoing trade tensions. Companies that rely heavily on Chinese manufacturing may accelerate efforts to diversify production hubs, shifting operations to countries such as Vietnam, India, or Mexico. Additionally, multinational corporations could explore increased investment in nearshoring and reshoring strategies, reducing dependency on overseas production by bringing manufacturing closer to consumer markets. These shifts could have long-term implications for global trade patterns, potentially redefining supply chain logistics and reshaping international trade agreements.