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Donald Trump’s administration has backtracked further from its threat to impose sweeping 25 per cent tariffs on Mexico and Canada, in a major climbdown from its aggressive trade agenda.
In the second U-turn in two days, the US president signed an executive order on Thursday saying that all goods that met the rules of a 2020 free trade deal with the US’s neighbours would be granted a one-month reprieve from the duties.
The move caps a tumultuous week that has roiled markets and frayed diplomatic relations between the US and its largest trading partners. On Wednesday, Trump had said that just carmakers compliant with the USMCA would be granted a month-long carve-out.
Thursday’s executive order grants the reprieve from tariffs until April 2. However White House officials signalled that Canada and Mexico could be granted relief beyond that date if they succeeded in cracking down on trafficking of the deadly opioid fentanyl.
The abrupt policy shift came after Trump doubled down on his tariffs plan in his address to Congress this week, saying: “There will be a little disturbance, but we’re OK with that.”
The levies’ imposition on Tuesday prompted a turbulent market reaction after Canada and Mexico announced plans to retaliate. All the S&P 500’s post-election gains have been erased following further declines on Thursday.
Howard Lutnick, Trump’s commerce secretary, said on Thursday that movements in the stock market would not drive US trade policy. “The fact that the stock market goes up or down a half per cent on any given day is not the driving force of our outcome,” he said.
The Trump administration’s shift is the latest in a chaotic policy rollout that has shaken America’s trade partners. According to the US trade representative, US goods and services trade under the USMCA totalled about $1.8tn in 2022.
Washington’s latest move came hours after data showed the US trade deficit swelled in January to a record $131.4bn, from a $98.1bn deficit in December. Economists said the increase was partly because of companies rushing to stockpile goods before the imposition of tariffs.
US car manufacturers, which have highly integrated supply chains across all three countries, have lobbied hard against steep tariffs being imposed.
Thursday’s executive order notes that automotive production is “integral to United States economic and national security”, adding that the pause on tariffs will “minimise disruption” to the US car industry.
According to analysis by Kyle Handley, an economist at the University of California San Diego, only about 9 per cent of the $60bn of car-related imports to the US from Canada did not comply with USMCA in 2023.
Handley found that about a quarter of car-related imports from Mexico were not compliant.
To qualify for the exemption from Trump’s tariffs, cars manufactured in Canada and Mexico must source between 65 per cent and 75 per cent of their parts from the region.
Automakers are also likely to be affected by planned US tariffs of 25 per cent on steel and aluminium, which are set to come into force next Wednesday.
Trump has said he plans to impose so-called reciprocal tariffs on trading partners from April 2 to retaliate against taxes, levies, regulations and subsidies that Washington considers unfair.
Lutnick said on Thursday that if Canada and Mexico made progress on fentanyl trafficking, the White House would “move just to the reciprocal tariff conversation”.
The Trump administration’s reversal on tariffs sparked gains in the Canadian and Mexican currencies on Thursday. Canada’s dollar rose 0.3 per cent against the dollar, while Mexico’s peso rallied 0.7 per cent.
US stocks were volatile, with the S&P 500 trading down 1.8 per cent and the tech-heavy Nasdaq Composite trading 2.6 per cent lower.
The executive order also lowered the duty on potash imports from Canada that do not comply with the USMCA to 10 per cent, providing relief to American farmers, who import around 80 per cent of the fertiliser from Canada.
