United States President Donald Trump has implemented sweeping 25 percent tariffs on Mexico and Canada.

The tariffs on the US’s biggest trading partners took effect at 00:00 Eastern Time (05:00 GMT), causing markets across the globe to tumble.

Washington has also imposed an additional 10 percent levy on Chinese imports, adding to the 10 percent imposed last month.

Mexico and Canada are the top US trading partners, accounting for more than 30 percent of total goods traded. The value of trade among the three North American countries is more than $1.6 trillion.

Tariffs would apply to imports from Mexico and Canada of almost $918bn.

How did we get here?

The tariffs on Mexico and Canada were among the first floated after Trump’s re-election in November. He said he is imposing them to get Mexico and Canada to curb immigration and drug trafficking into the US and to balance the trade deficit between the US and its biggest trading partners.

On February 3, Mexican President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau agreed to boost border security to prevent the trafficking of drugs and flow of migrants into the US in last-minute deals to postpone tariffs that had been set to come into effect on February 4.

Last month, Trump also announced 25 percent tariffs on aluminium and steel imports that are to come into effect on March 12, which Mexico and Canada will also be affected by.

What are tariffs and how do they work?

A tariff is a government-imposed tax on imported goods and services paid by businesses bringing them into the country.

Designed to protect domestic industries, tariffs often drive up costs for consumers by making foreign products more expensive, potentially reducing demand.

When the first Trump administration introduced tariffs in 2018, the aim was to strengthen US industries and penalise foreign exporters. However, American businesses and consumers bore the greatest burden from these tariffs rather than the foreign exporters.

The 25 percent US tariff on Mexican and Canadian exports could raise costs, reduce trade, lead to job losses, create economic uncertainty and trigger retaliatory tariffs, escalating a trade war.

What is the US-Canada and US-Mexico trade deficit?

The US is at a trade deficit with Canada and Mexico, meaning that it is buying more goods from those countries than it is selling to them.

In a statement from the White House on February 1, Trump stated that tariffs are a powerful source of leverage for the US, arguing that while trade accounts for 67 percent of Canada’s gross domestic product (GDP) and 73 percent of Mexico’s, it accounts for only 24 percent of US GDP. The US trade deficit in goods was the world’s largest at more than $1 trillion.

Mexico is the largest US trading partner. In 2024, the US imported $505.8bn in goods from Mexico and exported $334bn, resulting in a trade deficit of $171.8bn.

As the volume of trade has increased over the years, the US has consistently run a deficit with Mexico, which has expanded in the past 10 years.

The trade deficit between the two countries has increased by 12.7 percent from 2023 to 2024.

Canada is the second largest US trading partner. In 2024, the US imported $412.7bn in goods from Canada and exported $349.4bn, resulting in a trade deficit of $63.3bn.

While tariffs may aim to reduce trade deficits by reducing imports, the real impact of tariffs is more complex with the potential for retaliatory tariffs and higher prices for consumers.

How will tariffs affect the United States-Mexico-Canada Agreement (USMCA)?

In 2018 during his first term, Trump announced the USMCA as a replacement for the North American Free Trade Agreement (NAFTA), which had been signed in 1992 during President George HW Bush’s administration.

The USMCA, which came into effect in 2020, aimed to modernise trade between the three countries by strengthening labour and environmental protections, increasing car-manufacturing requirements, expanding digital trade rules and enhancing intellectual property protections.

A review of the USMCA is due in 2026, but the potential threat of tariffs could lead to these negotiations happening sooner.

US President Donald Trump delivers remarks on the USMCA during a news conference in the Rose Garden of the White House in Washington, DC, on October 1, 2018 [Kevin Lamarque/Reuters]

What Mexican products will be affected by tariffs?

Mexico is one of the largest foreign suppliers of goods to the US with cars, trucks and auto parts making up the largest share of exports. Machinery and electrical equipment follow as key exports, including industrial machinery, computers and household appliances. Other major exports include petroleum products, farm products, medical devices, plastics and textiles.

According to the Observatory of Economic Complexity (OEC), Mexico’s main exports to the US in 2023 were:

• Vehicles and auto parts ($123bn): including cars, trucks and automotive components
• Electrical machinery and electronics ($86.1bn): including computers, telecommunications equipment and consumer electronics
• Machinery, mechanical appliances and parts ($78.7bn): including industrial machinery and equipment
• Mineral fuels and mineral oils ($25.2bn): including petrol and refined petrol
• Optical, photographic, technical and medical apparatuses ($22.5bn): including instruments and appliances used in medical, surgical and scientific applications
• Furniture, bedding and lighting ($13.3bn): including household and office furniture, mattresses and lighting fixtures
• Beverages, spirits and vinegars ($11.6bn): including beer and hard liquor
• Fruit, nuts and fruit peels ($9.38bn): including tomatoes, avocados and a variety of fruits and vegetables

What Canadian products will be affected by tariffs?

Canada is the largest foreign supplier of oil to the US with energy products, including crude oil and petroleum products, accounting for about 30 percent of all Canadian exports to the US. Cars, tractors and auto parts are the second-largest export, followed by machinery and mechanical appliances. Other significant exports include medicines, plastics and wood products.

According to the OEC, Canada’s main exports to the US in 2023 were:

• Energy products ($131bn): including crude oil and petroleum products
• Cars, tractors, trucks and car parts ($56.7bn)
• Machinery and mechanical appliances ($32.2bn): covering industrial machinery and equipment
• Plastics and plastic articles ($14.2bn)
• Wood and charcoal products ($11.5bn): including plywood and saw wood
• Electrical machinery and equipment ($10.2bn): including electrical appliances and components
• Precious metals and stones ($9.87bn): including gold, silver and diamonds