On Feb. 1, President Donald Trump signed executive orders imposing tariffs on almost all imports from Canada, Mexico and China. Tariffs on China became effective on Feb. 4, while Canada and Mexico reached agreements with the U.S. to delay tariffs until March 4.
Here, Michigan State University professors Jason Miller, a supply chain management expert, and David Ortega, a food economics and policy expert, explain what tariffs are and discuss the significance of Trump imposing tariffs on these three nations.
How do tariffs work?
Ortega:
Tariffs are essentially taxes imposed on imported goods. When the U.S. government places a tariff on a product from another country, importers must pay an additional fee, which increases the total cost of bringing that good into the U.S. The company responsible for importing the product pays the tariff to the government and, often times, these importers are U.S. companies.
The tariffs that are being discussed are ad valorem, meaning that they apply to the value of the product. The tariff applies to the value of the product at the border, and it doesn’t factor in any value that the product accrues in the United States such as transportation and retailer margins.
Miller:
Tariffs are taxes paid by the entity importing a good to the United States. For example, a wholesaler of cell phones manufactured in China will now be forced to pay a specified percent of the customs import value of the goods to Customs and Border Protection, who will draw that amount from the importing entity’s bank account. CNBC has a good video explaining this process.
How will tariffs impact the U.S. economy?
Miller:
The general expectation is tariffs will be a net negative impact on the U.S. economy, as this is the general conclusion from academic research examining the 2018-19 U.S.-China trade war. During that period, manufacturers that saw larger increases in tariffed inputs to their production processes saw slower export growth, and manufacturing sectors targeted for retaliation saw reductions in employment.
Ortega:
The economic impact of tariffs depends on their scope and duration. In the short term, tariffs can raise prices for imported goods. But they can also raise the price of intermediary goods, or inputs that we import and are needed to produce goods domestically. Imposing tariffs on our trading partners can lead to retaliatory tariffs from other countries, which hurt U.S. exporters — especially in agriculture and manufacturing. We saw this play out during the U.S.-China trade war, where tariffs led to higher costs for consumers and significant losses for American farmers.
How will tariffs impact Michigan businesses?
Miller:
Tariffs on Canadian and Mexican auto parts and finished vehicles will be highly detrimental to Michigan. For example, over 50% of imported auto parts from Canada have a final destination in Michigan, where they are used by automakers as inputs into either other auto parts (e.g., broader assemblies) or directly put into finished vehicles. Likewise, Michigan is a key state of final destination for auto parts produced in Mexico. Michigan firms also import a lot of steel and aluminum from Canada for use in making their goods. These products will become less cost competitive due to higher steel prices.
Ortega:
Michigan’s economy is deeply tied to both manufacturing and agriculture, so tariffs could hit the state particularly hard. From Canada alone, Michigan imports around $1.5 billion worth of agricultural and food products. We also rely on imports of fresh produce from Mexico to meet year-round consumer demand for fresh fruit and vegetables. Moreover, U.S. agriculture relies on exports to sustain prices and revenues, and past trade disputes have shown that retaliatory tariffs can disrupt foreign market access for Michigan-grown products like dairy, meat, soybeans and other grains and specialty crops.
What sectors/industries could be most impacted by these new tariffs?
Ortega:
Given the scope and scale of the tariffs that have been proposed, this would really affect many sectors of the U.S. economy from manufacturing and automotive to agriculture. In the agri-food sector, we depend on trade with our trading partners to meet year-round consumer demand for fresh fruit and vegetables, as well as rely on imports for goods that we cannot produce domestically such as coffee, spices, tropical fruit, etc.
Mexico and Canada are our largest and arguably most important trading partners. We import over $45 billion worth of products from Mexico, as the majority of our fresh produce imports — fruits and vegetables — come from there. For example, 90% of avocados consumed in the U.S. are from Mexico. We also import berries — particularly strawberries and raspberries — from Mexico, as well as tomatoes, peppers, cucumbers, squash, cabbage and onions. We also import beer and tequila from Mexico.
Total agri-food trade with Canada is valued at more than $72 billion, with more than $28 billion in U.S. exports, including grain alcohol, processed foods, consumer-oriented products, pet food and corn. We import baked goods, canola oil, beef and pork, and processed potato products among other items from Canada.
China has emerged as a major market for U.S. agricultural exports. Key commodities like soybeans, corn, beef, cotton, pork, poultry and dairy products form the backbone of this trade relationship.
Miller:
The impacts vary by country. For imports from Canada, the most impacted sector is energy by far, followed by finished vehicles, various primary metals (nonferrous metals, aluminum and steel), auto parts, lumber, and aerospace products and parts. We also see pharmaceuticals, inorganic chemicals, for example: chlorine for waste water treatment and phosphatic fertilizer.
For Mexico, the key imports are finished motor vehicles, computers, motor vehicle parts, heavy duty trucks, audio and video equipment, electrical goods, fruits and vegetables, beer, liquor, etc.
For China, the top imports are consumer electronics like cell phones and computers; dolls, toys and games; batteries (especially for electric vehicles); small electrical appliances; apparel and footwear; and various home goods.
What goods will we pay more for? How will consumers see the impact on their wallets?
Miller:
The types of goods are highlighted above, but the amount of additional price the consumer pays will vary by product category. The general expectation, consistent with the last round of tariffs, is that importers will pass most of the higher costs due to tariffs onto consumers. I expect this will be greatest for categories of goods where the tariffed country/countries represent a larger share of total imports, a larger share of U.S. consumption is imported, and the price elasticity of demand is lower. A good example is avocados; if tariffs are ultimately placed on Mexico, expect avocados to become more expensive because Mexico accounts for more than 85% of avocados consumed in the U.S. and so wholesalers and retailers importing that good know everyone’s costs have increased.
Ortega:
At the grocery store, the impact would be felt more immediately on perishable products that we import like fresh produce such as fruit and vegetables. Food products like avocados, tomatoes, peppers, berries, cucumbers, etc. — these are products that have a relatively short shelf-life and for which we can’t hold inventory for a prolonged period of time. Products like imported Mexican beer, tequila, Canadian maple syrup and other food items are also likely to see prices increase once tariffs are imposed.
What are the implications with respect to food?
Ortega:
Farmers and agricultural suppliers are already facing pressure from rising input costs and labor shortages. If tariffs lead to higher prices for machinery or fertilizers, it could further squeeze margins for farmers. Additionally, if key export markets like China, Mexico or Canada retaliate with their own tariffs on U.S. agricultural products, it could reduce demand and lower farm incomes at an already challenging time.
How could tariffs affect trucking and logistics?
Miller:
The general expectation is that tariffs reduce total transportation demand due to demand destruction. This also happened in 2019 during the trade war with China.
What response can we expect to see from China, Canada and Mexico?
Ortega:
We can expect our trading partners to retaliate. Canada, for example, announced a list of retaliatory tariffs on products, including food and agricultural products, that would go into effect should the U.S. impose tariffs. And historically, when the U.S. imposes tariffs, other countries respond with retaliatory measures. We saw this play out during the U.S.-China trade war in 2018. As a result of retaliatory tariffs, U.S. agricultural exports to China plummeted, with losses exceeding $25 billion. Soybean farmers bore the brunt of this impact.
The sweeping 10% tariffs on all Chinese imports went into effect on Feb. 4. In response, China announced that starting Feb. 10, it would implement retaliatory tariffs — a 15% tariff on coal and liquefied natural gas products in addition to a 10% tariff on crude oil, farm machinery and certain cars imported from the U.S.
Miller:
China’s response has been quite measured, as noted by Bloomberg. Canada and Mexico committed to more border security efforts, but we will see how this plays out since tariffs have only been delayed for a month.
What are reciprocal tariffs that Trump has proposed?
Ortega:
Reciprocal tariffs are tariffs that the U.S. government plans to impose on goods from other countries, matching the tariff rates that those countries impose on American products. While Trump argues that reciprocal tariffs will ensure fair trade, the U.S. already has similar agreements with many trading partners, which has been a product of long-standing trade negotiations under the World Trade Organization framework.
Miller:
A reciprocal tariff refers to the concept that if another country applies a tariff to a given category of U.S. exports that the U.S. would apply the same tariff rate to that nation’s exports to the U.S. In general, many of the largest trading partners with the U.S. have low tariff rates, meaning that the reciprocal tariff isn’t as disruptive as the blanket tariffs on Chinese imports (and certainly would be less disruptive than what an across-the-board tariff approach with Mexico and Canada would produce).
How do reciprocal tariffs differ from what Trump has imposed on China and could impose on Mexico and Canada?
Ortega:
Unlike the reciprocal tariffs being proposed, President Trump’s recent tariffs on China (in effect now), Mexico and Canada (paused until early March) are unilateral actions not based on existing foreign tariffs. The tariffs on these nations were intended to address specific issues and were not directly related to the tariff structures of those countries.
Miller:
With China, POTUS has placed an additional 10% tariff on top of tariffs already in place for Chinese goods. Looking at the top imports from China for 2024, we can see the rate of duties for the year varied substantially across products. For example, video game consoles were subject to no duties; this is now 10%. The idea for reciprocal tariffs would be that if we calculated these exact same data from, say, Germany, the U.S. would turn around and apply the same tariff on Germany.
