Trump’s latest tariffs on Canada, Mexico and China may be his biggest gambling

President Trump on Tuesday launched fair tariffs on clear reasons for imports from Canada, Mexico and China, one of the biggest gamblings in his presidency, which sparked the risk of a trade war that would undermine the U.S. economy.

His actions subvert diplomatic relations with the U.S.’s largest trading partner, thriving markets and inspiring retaliation for U.S. products, confusing businesses, investors and economists for why Trump did not engage in extended negotiations or explicit reasoning to cause such unrest.

Mr. Trump has made various explanations of the tariffs, saying they are punishments for other countries’ failure to stop the flow of drugs and immigrants into the United States, a way to force manufacturing back to the United States and to take advantage of the United States’ national retribution. On Tuesday, he saw Canada’s hostility to Bank of America as another reason.

Canadian Prime Minister Justin Trudeau said it was difficult to understand Mr. Trump’s justification for tariffs, but he believed his intention was to undermine Canada’s responsibility. “What he wants is to see a complete collapse of the Canadian economy because it will make it easier for us to annex us,” Mr Trudeau said in a press conference on Tuesday. “This will never happen. We will never be the 51st state.”

Commerce Secretary Howard Lutnick said Tuesday afternoon that the president could arrive in some kind of accommodation in Canada and Mexico, announcing it on Wednesday. “I think he’ll figure it out, you’ll do more, and I’ll meet you somehow,” Lutnik said.

Canada has announced a series of retaliatory tariffs on $20 billion worth of imports, and Mr Trudeau said other “non-tax laws” measures are about to be proposed.

“Yes, he may cause damage to the Canadian economy, but he will find it quickly because American families will find it quickly and it will hurt people on both sides of the border,” Mr Trudeau said.

Stock markets around the world are declining. In the U.S., the financial sector has been hit hardest along with many companies, including cruise companies and large tech companies. The S&P 500 index fell 2%, then reduced its losses in the afternoon. The decline added Monday’s 1.8% loss, the biggest drop this year.

The bet Mr. Trump seems to be making is that the U.S. is so important to the economic intensity and vital of international business that he can use tariffs as cudgels to solve almost every problem. But the integration of Mr. Trump’s fusion of mercantilism and bullying strategies has the potential to undermine the stability of the U.S. economy, which suffered three years of inflation and is now facing a slowdown in growth.

At the moment when inflation is not yet fully controlled, the president imposed a huge import tax on the U.S.’s largest trading partner, a decision that many economists believe will further increase the costs of American households and hinder economic growth.

“The American people are counting on President Trump to reduce costs and develop the U.S. economy,” said Michael Hanson, senior executive vice president of public affairs at the Association of Retail Industry Leaders. “Tariffs on Canada and Mexico put these goals at serious risk and risk destabilizing North American economics.”

Anxious business groups held an emergency meeting Tuesday to determine their reaction to trade moves, which imposed 25% tariffs on Canadian and Mexican products and increased tariffs by 10% on China. Some groups are considering legal action to challenge the NSA, the Trump administration is invoking tariffs.

Others try to work hard to deal with their meaning to the bottom line. Target warned Tuesday that tariffs could hurt its efforts to recover from tough 2024 efforts, saying consumers can withdraw spending amid greater uncertainty about the economy and that the company could raise prices for certain products as early as this week. Best Buy CEO Corie Barry said on a conference call that price increases were “very likely”, but it was hard to tell how big they would be.

National chief economist Kathy Bostjancic estimates that if tariffs are maintained and retaliated, economic growth will be lower than the previous percentage. This shows that the U.S. economy will only grow by 1% in 2025. In 2024, it grew by 2.5%.

Ms Bostjancic also estimates that tariffs could drive prices up, which would increase the price by an average of $1,000 a year for households.

Some businesses and unions that will benefit from the tariffs have praised them. United Auto Union said they were “happy to see a U.S. president taking positive action when ending the free trade disaster, which is like a bomb down on the working class.”

Mr. Trump showed no sign of retreating on Tuesday, saying that if the company set up factories in the U.S., tariffs could be avoided.

“If the company moves to the United States, there will be no taxes!!!” Mr. Trump wrote in his truth social networking on Tuesday.

Hours later, Mr. Trump warned that the United States would increase its “reciprocal” tariffs if Canada retaliates with its own higher tariffs.

Mr. Trump’s top financial aide tried to explain the decision Tuesday. Mr. Lutnik said on CNBC that tariffs are not “trade wars” and called the conflict a “drug war.”

If Canada and Mexico can prove to the president that they can stop the flow of fentanyl, then “of course, the president can eliminate these tariffs,” the Commerce Secretary said. But he said the United States did not see “statistically related reductions in deaths in the United States.”

Official statistics show that overdose deaths in the United States have dropped sharply in the 12 months to September, and crossings at the U.S.-Mexico border have fallen.

Mr Lutnik said the president will take other trade-related actions against Canada and Mexico in April. “Canada and Mexico were invited to have a wonderful economic deal with the United States of America, and they abused the invitation,” Lutnik said.

Everett Eissenstat, a partner at Squire Patton Boggs and a former economic adviser to Mr. Trump, said the president appears to be unhappy with progress in combating drug trafficking, but said he may have other goals.

“I think it’s about fentanyl, but it’s also about the broader situation,” he said.

Mr Trudeau, along with Mexico’s Claudia Sheinbaum, hinted that the government is creating false excuses for tariffs.

Ms. Sheinbaum rejected the “fentanyl argument” cited by Mr. Trump to prove the tariffs after having achieved success in combating recent successful drug trafficking in Mexico.

“We work together to prevent illegal drug trafficking from entering the U.S. for humanitarian reasons,” she said in a statement. “But, as we have said in many cases, the government must also be responsible for the opioid crisis that has caused many deaths in the U.S..”

Mr Trudeau called Mr Trump’s reasons “completely false, completely unreasonable, and completely wrong.”

One of Mr. Trump’s main goals is to force more domestic manufacturing. He also viewed the trade deficit as a “U.S. subsidy” for other U.S. countries and believed that tariffs could help offset tax cut costs and help repay $36 trillion in Treasury bonds.

Tariffs may encourage some companies to open factories in the United States to serve U.S. customers. But Canada, Mexico and China have also announced plans to retaliate against the U.S. exports, attacking a large number of U.S. sectors, including agriculture, retail and automobiles.

The economic impact of tariffs depends largely on how global trade shifts to address increased costs and how consumers adapt. Pantheon macroeconomics economists believe that trade shifts to Vietnam and Mexico during Mr. Trump’s trade war, and these tariffs are expected to cause the U.S. share of imports from Mexico to 13%, down 2 percentage points. They also expect our imports from Canada to fall to 10%.

New York Federal Reserve Bank president John C. Williams warned Tuesday that tariffs could lead to higher U.S. prices, but were highly uncertain.

He said at an event hosted by Bloomberg that he began to consider the impact of tariffs on inflation: “Because I think we will see some of these effects later this year.”

Mr Williams stressed that the Fed is also paying close attention to how tariffs will affect economic activity, including whether businesses continue to invest or whether consumers continue to spend. “That’s where I think another big uncertainty is.”

Mr. Trump’s calculations may be correct, because tariffs will harm U.S. trading partners more than the United States. Because the United States is a big country with multiple resources, it is less dependent on trade than many other advanced economies. Tariffs can also strengthen the dollar (which is the world’s reserve currency), making imports seem cheaper and weaken the impact of taxes.

Trade in goods and services accounts for about a quarter of the U.S. economic activity, while Mexico and Canada are about 70% and China is 37%. Both Canada and Mexico send about 80% of their exports to the United States, making them very dependent on the United States.

Foreign governments have responded to the threat of Mr. Trump’s tariffs, quietly working to diversify their trade relations and seeking other partners outside the United States. Mexico has updated its trade agreement with the EU and has promoted it in its trade talks with Brazil. Europe reached a separate agreement with South American countries and Switzerland.

Nevertheless, the negative impact of tariffs may be inevitable, especially for Canada and Mexico. An analysis conducted by the Peterson Institute for International Economics in February found that tariffs on all import taxes imported from Canada and Mexico were matched by similar tariffs from these countries, which would cause the U.S. economy to shrink in the next few years, although Canada and Mexico economies would shrink more.

Tariffs against Congressional Democrats were promptly condemned as Republicans nervously defended them.

Senate Majority Leader John Thune, a South Dakota Republican, said Mr. Trump’s tariffs “are centered around a specific goal, in this case, to reduce the amount of fentanyl that our borders span across this country. So, I think those tariffs are temporary.”

“Hopefully, it’s all over, and it won’t cause much damage,” he said.

Ted Cruz, a Republican of Texas, also said he hopes the tariffs will not continue for a long time.

“Texas has a lot of trade with Mexico and Canada,” Cruz said. “So, I hope these tariffs are what President Trump calls the driving force.”

Colby SmithJoe Rennison and Catie Edmondson contributed the report.