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Donald Trump has paused the introduction of tariffs on imports from Canada and Mexico, but experts fear the US president’s continued threats of disruption risk a breakdown in the world’s multilateral trading system.

Trump’s February 1 announcement of tariffs targeting China, Canada and Mexico – the US’ three largest trading partners – had an immediate effect. Stock markets fell globally when they opened after the weekend, Canada announced retaliatory tariffs, and China opened dispute proceedings at the World Trade Organization (WTO).

By midday that Monday, February 3, the tide had started to turn. Following a half-hour conversation with Mexican President Claudia Sheinbaum, Trump agreed to pause tariffs on imports from Mexico for a month in exchange for the country sending 10,000 troops to its northern border to prevent the drug fentanyl from entering the US.

By the end of the day, Canada had also secured a pause.

But despite the successful negotiation, the threat posed by imposing tariffs on the US’ closest neighbours is far from over.

The delay “is part Trump being a dealmaker, part Trump being the producer of the world’s most important soap opera”, says Simon Geale, executive vice-president at supply chain consultancy Proxima.

“It’s a negotiation, and that negotiation is playing out in front of our eyes, rather than behind the scenes. This is super hard for businesses, because they span geographic boundaries in a way that governments don’t.

“It’s going to be hard for them to unwind some of those trade patterns, it’s going to be hard for them to swallow pricing implications, and ultimately they’re going to have to pass on costs to the consumer.”

The United States-Canada-Mexico agreement, agreed during Trump’s first term, allowed for tariff-free trade between the three nations, and has meant that supply chains are highly integrated across the borders of the North American countries.

This means that any US-imposed tariffs will not only affect Mexican and Canadian manufacturers, but those within the country as well.

Economist Rebecca Harding believes this integration makes it unclear how tariffs would work in practice if they are brought in.

“We might have seen political globalisation collapse, but we haven’t seen economic globalisation collapse,” she told GTR on February 3, prior to the tariff pauses.

“In fact, these supply chains are just as interdependent as they always were. So how do tariffs work on a border? Are they on the final price of the car? Well, actually, that’s daft, because an awful lot of exports from Mexico are car parts rather than the final product. Often the last stage of it – the high-value end – is done in the US.”

One of Trump’s key aims in office is to rejuvenate US manufacturing, even if it means higher prices.

To that end, the threat of tariffs has already seen some success. Dutch-headquartered multinational automotive manufacturer Stellantis, which has factories in the US, Canada and Mexico, announced US$5bn of investment into plants in the US prior to Trump taking office, directly referencing his presidency as a reason.

At the end of January, Reuters reported that the chief executive of luxury goods producer LVMH, Bernard Arnault, said he was considering expanding manufacturing in the US over the company’s native France, describing the market in the country as “very dynamic”.

 

China: Defender of free trade?

The one country that was unable – or perhaps unwilling – to secure a delay on the tariffs was China. The economic superpower has been locked in a trade war with the US since Trump’s first term, fuelled by allegations of unfair pricing, forced labour and technology transfer.

The impact has been felt by both parties, with a report last year suggesting that many corporates are planning to move operations out of China, at least in part due to tariff difficulties, while a 2023 research paper found that US importers shouldered 93% of price increases caused by tariffs on China.

This latest volley is no different, with Trump’s blanket 10% tariff countered by China’s imposition of duties on fossil fuels and agricultural machinery. The country has also brought in export controls on rare earth metals, which have become a crucial battleground between the two nations in recent years.

Beyond domestic measures, China has also filed a complaint against the US at the WTO. Though on the surface a mere formality, experts speaking to GTR believe it may be part of a larger strategy.

The WTO’s appellate body has lacked quorum since 2019, when the US blocked the appointment of new nominees. Since then, the body has had no ability to legally resolve international trade disputes, rendering it largely useless, says Harding.

“The WTO is dead in the water to a very large extent, and Biden didn’t do anything to rejuvenate it,” she says.

“It’s not been able to get its act together with things like cross-border digital trade, it’s got a lot of problems in terms of its own effectiveness, but the most important thing it hasn’t got is an appellate body to hear trade disputes.”

For Harding, China’s complaint is more likely a long-term strategic move.

“It’s saying ‘we still believe in the international rules-based order, and we still believe that the World Trade Organization is a place to launch these disputes’,” she says.

“[China] will be very strategically diplomatic to start with.”

This approach marks a stark contrast to the one taken by Trump, for whom tariffs are one tool among many to achieve his goals, says Marco Forgione, director general of the UK’s Chartered Institute of Export and International Trade.

“It’s clear that the America First programme is not just about trade and tariffs, but about what President Trump’s administration sees as a rebalancing of the geopolitical landscape, and tariffs is a part of what they’re looking to do,” he says.

Unfortunately for exporters to the US, tariffs imposed for political reasons may be imposed – or revoked – in unpredictable ways, making forward planning difficult.

“We’re seeing a really fundamental shift in the way in which the global economy has run, and that means trade and the levers of trade are being used for much more than just trade-related issues,” Forgione tells GTR.

“That creates a more challenging environment for Canada and the EU, and potentially the UK, to have to respond to, because Trump is using trade tools to deliver a societal, economic and geopolitical benefit.”

What the US will do next is unclear, but one thing looks certain: there’s no going back to how things were.

“It is a world trade war,” Harding says. “We were not expecting to be fighting a trade war with our closest political ally, but we are.”