Trump's trade war is starting with new tariffs. Here's everything you need to know

President Donald Trump has officially kicked off the first trade war of his second administration with new taxes on imports from Canada, China, and Mexico.

Here’s what you need to know.

What did Trump announce?

The U.S. president on Saturday announced a slew of tariffs on imported goods from the nation’s top trade partners.

That includes a 25% tariff on all Mexican imports, 25% on most Canadian imports, and 10% on all Chinese imports. Energy exports from Canada will be taxed at a 10% rate because the U.S. is highly dependent on Canadian crude oil.

All tariffs are expected to go into effect on goods that cross into the U.S. or are withdrawn from a warehouse on or after 12:01 a.m. ET on Tuesday, according to the White House. If goods are packed on a ship leaving a foreign port or in transit before that time, they will not be subject to the new duties.

However, Mexico’s president, Claudia Sheinbaum, on Monday said that tariffs will be paused for one month after she and Trump came to a deal. The terms include both nations doing more to prevent the flow of drugs into the U.S. and weapons into Mexico. Further negotiations will take place throughout February.

“I look forward to participating in those negotiations, with President Sheinbaum, as we attempt to achieve a ‘deal’ between our two [c]ountries,” Trump said in a statement.

The de minimis exemption, a key loophole used by e-retailers like Temu and Shein to keep prices down, will also be frozen when the tariffs come into effect. The law allows for packages valued at less than $800 to enter the U.S. duty-free as long as they are packaged and addressed to individual buyers.

“WE ARE A COUNTRY THAT IS NOW BEING RUN WITH COMMON SENSE — AND THE RESULTS WILL BE SPECTACULAR!!!” Trump wrote on his Truth Social on Sunday.

Between January and November 2024, trade with Mexico totaled $776 billion, making it the U.S.’s top trade partner. Trade between the U.S. and Canada came out to $699 billion during that period, while trade with China totaled $532 billion, according to the U.S. Census Bureau.

What are tariffs, anyway?

Tariffs are simply duties tacked onto foreign-made goods imported into the U.S. and paid by the importing business.

The most common tariffs are what is called “ad valoreum,” which represent a fixed percentage of the value of the imports. Trump’s 25% tariffs on Canadian and Mexican goods would be considered ad valoreum.

Other types of tariffs can include “specific tariffs,” which are charged as a fixed amount on each imported good, and “tariff-rate quotes,” which are triggered after a certain threshold of imports is reached. Trump slapped washing machines with a tariff-rate quota in 2018; the first 1.2 million imported washing machines were hit with 20% tariffs, while importers paid 50% on additional units.

Tariffs are paid to the federal government by the companies responsible for importing the product. Those fees are usually collected by U.S. Customs and Border Protection, although Trump wants to create a new agency to specifically collect that money.

Consumers, in the end, usually end up paying higher prices for the same goods after tariffs kick in. Many companies simply can’t afford to absorb the additional cost of the fees, so they push the price along to their customers.

Best Buy, Autozone (AZO+1.85%), Stanley Black & Decker (SWK-3.63%), and Columbia Sportswear (COLM-2.72%) are just a handful of the major companies that have said they will likely have to raise prices.

“If you have a 10% profit margin, then a 25% tariff completely wipes out that profit margin,” Jack Rossbach, an assistant professor of international economics at Georgetown University in Qatar, previously told Quartz.

How did Canada, China, and Mexico respond?

Canada has already announced its own retaliatory tariffs on U.S. goods, beginning with a 25% tariff on $20.4 billion worth of goods set to take effect on Tuesday. Additional tariffs on $107 billion worth of goods will be made active in 21 days.

“This is a choice that, yes, will harm Canadians. But beyond that, it will have real consequences for you, the American people,” Canadian Prime Minister Justin Trudeau said of the U.S. tariffs during a press conference Saturday.

“Yes, we’ve had our differences in the past, but we’ve always found a way to get past them,” said Trudeau. “As I’ve said before, if President Trump wants to usher in a new golden age for the United States, the better path is to partner with Canada, not to punish us.”

Before Sheinbaum announced the deal with Trump to delay his tariffs, she had directed Mexico’s economy secretary to implement a series of tariff and non-tariff retaliatory measures “in defense of Mexico’s interests.” She also said that Mexico “categorically” rejects the White House’s “slander” and accusations it has connections to cartels, noting the progress Mexico has made since she took office in October.

“Mexico does not want confrontation,” she wrote on Saturday, calling for the U.S. and Mexico to work together to combat crime and drug trafficking. “Problems are not resolved by imposing tariffs, but by talking and dialoguing.”

China’s Ministry of Commerce said it will file a lawsuit with the World Trade Organization and take “corresponding countermeasures,” according to a translated statement. Part of the WTO’s role is to help resolve trade disruptes, having issued more than 350 rulings on such matters.

“The unilateral tariff increase by the United States seriously violates WTO rules,” the ministry said. “It is not only unhelpful in solving its own problems, but also undermines the normal economic and trade cooperation between China and the United States.”

What goods could be most affected?

Despite repeatedly saying on the campaign trail that tariffs wouldn’t raise costs for consumers, Trump has now admitted they may hurt American citizens.

“THIS WILL BE THE GOLDEN AGE OF AMERICA! WILL THERE BE SOME PAIN? YES, MAYBE (AND MAYBE NOT!). BUT WE WILL MAKE AMERICA GREAT AGAIN, AND IT WILL ALL BE WORTH THE PRICE THAT MUST BE PAID,” Trump wrote on Truth Social.

Mexico’s previously planned retaliatory measures were expected to target food products, such as cheese, pork, and whiskey, along with manufactured steel and aluminum, Reuters reported last week.

The U.S. imported $38.5 billion in agricultural goods from Mexico in 2023, including 90% of all avocados, along with $40.5 billion worth of agricultural imports from Canada. Other major imports from Canada, Mexico, and China include aluminum, wood, plastics, electronics, semiconductors, and more.

Canada’s list of affected goods is wide-ranging and meant to hurt regional industries.

“Like the American tariffs, our response will also be far-reaching and include everyday items such as American beer, wine and bourbon, fruits and fruit juices, including orange juice, along with vegetables, perfume, clothing and shoes,” Trudeau said on Saturday. “It’ll include major consumer products like household appliances, furniture and sports equipment and materials like lumber and plastics, along with much, much more.”

Canadian leaders are also considering several non-tariff measures, including some relating to energy and critical minerals, Trudeau said. David Eby, the premier of British Columbia, has directed government agencies to exclude U.S. supplies from new purchasing agreements. Ontario’s premier, Doug Ford, said the province would ban American companies from provincial contracts.

“We’re going one step further. We’ll be ripping up the province’s contract with Starlink. Ontario won’t do business with people hellbent on destroying our economy,” Ford wrote on X. Starlink is a subsidiary of SpaceX, which is led by Elon Musk, a senior advisor to Trump.

According to S&P Global Mobility, almost all original equipment manufacturers will be impacted by the tariffs on Canada and Mexico. Wolfe Research has estimated a 25% tariff would add about $3,000 to the average cost of vehicles sold in the U.S. Even Tesla (TSLA-6.32%), which has the most “American” cars, will likely be impacted, according to CFO Vaibhav Taneja.

Canada is also the source of more than half the U.S.’s imports of crude oil, shipping four million barrels on average every day between January and November 2024. Mexico delivered 465,000 barrels per day. Oil prices are expected to rise, although the lower tariff on Canadian energy will reduce some pain at the pump.

How are markets responding?

Shortly after the market opened Monday, the Dow fell by 558 points, or 1.25%. The S&P 500 lost 1.6%, while the tech-heavy Nasdaq shed 2%. The CBOE Volatility Index, a popular metric to judge the market’s expectations for volatility over the next 30 days, was up 21%.

Cryptocurrencies were also hit, as the global cryptocurrency market capitalization fell 7% over the last 24 hours, according to CoinGecko. Bitcoin was trading at $98,12 Monday morning after falling 2.67% to just over $95,000 earlier in the day.

“These announcements have come as a shock to many investors who expected tariffs would only be imposed if trade negotiations failed,” Goldman Sachs (GS-0.96%) analysts said in a note Sunday.

Goldman estimates that Trump’s tariffs would reduce its S&P 500 earnings per share by roughly 1% to 2% for every 5-percentage-point increase in the tariff rate. Without taking into account any additional impacts, the investment bank estimates a 2% to 3% hit to the S&P 500 companies’ earnings per share.