US Reverses Course on Canada-Mexico Tariffs in Sudden Trade Shift

Major U-Turn on Tariffs

The US government has backtracked on its plan to impose 25% tariffs on Mexico and Canada, marking another sharp shift in trade policy. In a surprise move, President Donald Trump signed an executive order granting a one-month reprieve for all USMCA-compliant goods. This decision extends an earlier exemption that only applied to car manufacturers.

Why the Sudden Change?

The reversal comes amid market turmoil and diplomatic tensions following Trump’s initial tariff announcement. Canada and Mexico had threatened retaliation, and the US stock market erased all post-election gains as investors reacted to the uncertainty.

White House officials suggested that Canada and Mexico could secure a longer exemption if they crack down on fentanyl trafficking, a key demand from the US administration.

Impact on Markets & Economy

• Stock Market: US stocks remained volatile, with the S&P 500 falling 1.8% and the Nasdaq dropping 2.6%.
• Currency Gains: The Canadian dollar rose 0.3%, while Mexico’s peso climbed 0.7% on hopes of trade stability.
• Trade Deficit: The US trade deficit hit a record $131.4 billion in January, partially due to companies stockpiling goods ahead of potential tariffs.

Automakers Breathe a Sigh of Relief

The automotive industry, deeply reliant on North American supply chains, lobbied heavily against the tariffs. According to research, 91% of car-related imports from Canada and 75% from Mexico meet USMCA standards, making them eligible for the exemption.

The executive order acknowledges that automotive production is crucial to US economic and national security and aims to minimise disruption.

What’s Next for Trade Policy?

While the current exemption lasts until April 2, Trump has hinted at introducing reciprocal tariffs against countries that impose taxes, levies, or regulations the US deems unfair. Additionally, a 25% tariff on steel and aluminium is still set to take effect next week, adding further uncertainty.

Conclusion: Uncertain Future for Trade Relations

The USMCA tariff exemption is a temporary relief, but the broader uncertainty in US trade policy continues to impact markets and businesses. With tariffs on steel, aluminium, and other goods still in play, the next few months will be critical in shaping North American trade relations. The key question remains: Will Canada and Mexico secure a long-term deal, or is more trade turbulence ahead?

Source: (FT.com)