President Donald Trump said Monday that 25 per cent taxes on imports from Mexico and Canada would start Tuesday, sparking renewed fears of a North American trade war that already showed signs of pushing up inflation and hindering growth.

“Tomorrow – tariffs 25% on Canada and 25% on Mexico. And that’ll start,” Trump told reporters in the Roosevelt Room. “They’re going to have to have a tariff.” Trump has said the tariffs are to force the two US neighbours to step up their fight against fentanyl trafficking and stop illegal immigration. But Trump has also indicated that he wants to even the trade imbalance with both countries as well and push more factories to relocate in the United States.

S&P 500 drops 2%

His comments quickly rattled the US stock market, with the S&P 500 index down 2 per cent in Monday afternoon trading. It’s a sign of the political and economic risks that Trump feels compelled to take, given the possibility of higher inflation and the possible demise of a decades-long trade partnership with Mexico and Canada.

Yet the Trump administration remains confident that tariffs are the best choice to boost US manufacturing and attract foreign investment. Commerce Secretary Howard Lutnick said Monday that the computer chipmaker TSMC had expanded its investment in the United States because of the possibility of separate 25 per cent tariffs.

In February, Trump put a 10 per cent tariff on imports from China. He reemphasized Monday that the rate would be doubling to 20 per cent on Tuesday.

Trump provided a one-month delay in February as both Mexico and Canada promised concessions. But Trump said Monday that there was “no room left for Mexico or for Canada” to avoid the steep new tariffs, which were also set to tax Canadian energy products such as oil and electricity at a lower 10 per cent rate.

Ready for retaliation

“If Trump is imposing tariffs, we are ready,” said Canadian Foreign Minister Mélanie Joly. “We are ready with $155 billion worth of tariffs and we’re ready with the first tranche of tariffs, which is $30 billion.” Joly said Canada has a very strong border plan and explained that to Trump administration officials last week. She said the diplomatic efforts are continuing. She spoke after Trump made his comments Tuesday.

Mexico President Claudia Sheinbaum went into Monday waiting to see what Trump would say.

“It’s a decision that depends on the United States government, on the United States president,” Sheinbaum said ahead of Trump’s statement. “So whatever his decision is, we will make our decisions and there is a plan, there is unity in Mexico.” Both countries have tried to show action in response to Trump’s concerns. Mexico sent 10,000 National Guard troops to their shared border to crack down on drug trafficking and illegal immigration. Canada named a fentanyl czar, even though smuggling of the drug from Canada into the United States appears to be relatively modest.

As late as Sunday, it remained unclear what choice Trump would make on tariff rates. Lutnick told Fox News Channel’s “Sunday Morning Futures” that the decision was “fluid.” “He’s sort of thinking about right now how exactly he wants to play it with Mexico and Canada,” Lutnick said. “And that is a fluid situation. There are going to be tariffs on Tuesday on Mexico and Canada. Exactly what they are, we’re going to leave that for the president and his team to negotiate.” Treasury Secretary Scott Bessent said Mexico has also offered to place 20 per cent taxes on all imports from China as part of talks with the United States.

Bessent told CBS News on Sunday that China would “eat” the cost of the tariffs, instead of passing them along to the US businesses and consumers that import their products in the form of higher prices.

But companies ranging from Ford to Walmart have warned about the negative impact that tariffs could create for their businesses. Similarly, multiple analyses by the Peterson Institute for International Economics and the Yale University Budget Lab suggest that an average family could face price increases of more than $1,000.

Disruptive for businesses

“It’s going to have a very disruptive effect on businesses, in terms of their supply chains as well as their ability to conduct their business operations effectively,” said Eswar Prasad, an economist at Cornell University. “There are going to be inflationary impacts that are going to be disruptive impacts.” Prasad cautioned that some of the cost increases from the tariffs would be offset by the US dollar increasing in value. But a stronger dollar could also make American made goods less competitive in foreign markets, possibly making it harder for Trump to close the trade imbalance.

Trump also plans to roll out what he calls “reciprocal” tariffs on April that would match the rate charged by other countries, including any subsidies and and value added taxes charged by those countries.

The US president has already announced the removal of exemptions from his 2018 tariffs on steel and aluminium, in addition to tariffs on autos, computer chips, copper and pharmaceutical drugs.