Tariffs Shake Up Free Trade Zone: What’s Trump’s Strategy, and How Will It Impact Trade?

Published: 3/6/2025, 7:11:52 AM EST

Tariffs Shake Up Free Trade Zone: What’s Trump’s Strategy, and How Will It Impact Trade? — Shipping containers are stacked high at the Port of Long Beach in Long Beach, Calif., on March 4, 2025. (Frederic J. Brown/AFP via Getty Images)

The free trade zone of North America is no more. At least for now. President Donald Trump imposed 25 percent universal tariffs on all goods crossing into the United States from Canada and Mexico, two partners in the 34-year-old free trade agreement once known as NAFTA. The tariffs went into effect on March 4.

Tariffs also increased under the Section 301 China tariff policy, rising by an additional 20 percentage points over the existing tariff rates.

Some items, like semiconductors and EVs, are tariffed at higher rates. These increases were announced by the Biden administration in May 2024 and have been in effect since September.

There are more tariffs to come.

On Feb. 10, Trump announced he would re-impose global Section 232 steel and aluminum tariffs, removing tariff exemptions on countries like Brazil and the European Union. Those tariffs are slated to begin again on March 12.

What Are Tariffs and How Do They Work?

Tariffs are extra charges imposed on imported goods by a country’s government. While rare, some countries use export tariffs to control domestic supply, but the U.S. Constitution prohibits that.

A tariff is paid by the importer, often through a customs broker, when goods enter a country. Tariff rates vary depending on the product and country of origin.

All countries have tariffs. Even free trade partners often maintain some tariffs on specific goods or industries.

The United States has the lowest tariff rate in the world at just 3.4 percent for all nations and 3.3 percent for members of the World Trade Organization.

By comparison, Mexico charges non-WTO members a 36.2 percent tariff, while WTO members are charged 6.8 percent. China has a 10 percent tariff for non-members and a 7.5 percent tariff for WTO members. Hong Kong, which is a services economy, has no tariffs at all.

A graph shows some of the tariff rates charged by large economies. (Kenneth Rapoza/NTD) — A graph shows some of the tariff rates charged by large economies. Kenneth Rapoza/NTD

Historically, U.S. tariffs served two main purposes:

Revenue Generation—Before income taxes, tariffs were a primary source of government funding.
Industrial Protection—Tariffs helped build American manufacturing by shielding domestic industries from foreign competition, particularly when Britain and Europe dominated global production.

Who Pays Tariffs?

Importers pay tariffs. Importers sometimes hire customs brokers to manage tariff payments when goods cross the border. Currently, customs brokers are mainly asking companies in Mexico, Canada, and the United States to deposit cash upfront to pay these new tariffs.
Sometimes a company passes the extra cost onto consumers, either by raising prices, absorbing the cost through reduced profit margins, or adjusting supply strategies, such as modifying order volumes or new financing terms. This means that a 25 percent tariff on a $100 import does not become a $125 good.

Law firm White & Case said that unlike tariff actions during Trump's first term, the new tariff orders do not allow for product exclusions. It may be possible that the government will decide to introduce an exclusions process in the future, but Trump administration officials say they do not intend to allow exclusions at this time.

On March 5, White House press secretary Karoline Leavitt announced that the Trump administration is giving automakers a one-month exemption on tariffs imposed on Mexico and Canada. The decision came after the heads of Ford, General Motors, and Stellantis made the exemption request during a phone call with Trump.

Mexico and Canada Tariffs: Why Enacted and Will They Stay?

Trump first threatened tariffs on Mexico and Canada on Feb. 1, citing the border and fentanyl crises. He gave both countries one month to prepare for tariffs. At the time, he alluded to the possibility of avoiding tariffs if Mexico and Canada helped stop the flow of fentanyl across the border.

Mexico, in particular, has worked with Washington to police the southern border. On Feb. 27, Mexican authorities extradited 29 fentanyl drug dealers and members from the Sinaloa and Los Zetas cartels, among others. In a Feb. 18 update, the border patrol said crossings are down 85 percent compared to the same time last year. However, the new tariffs still took effect.

Canadian oil and gas will see a 10 percent tariff instead of duty-free rates, while all agricultural goods will be tariffed at 25 percent beginning April 1. The United States has become a net importer of food.

The Trump administration said it will use tariffs as leverage to exact concessions from countries on national security grounds. Colombia is a good example. Colombia briefly lost its free trade agreement with the United States when its government refused to take in deportees. But when Colombia complied, the tariffs were rescinded.

It is unclear why the White House is sticking with these tariffs on Mexico and Canada.

The Trump administration stated it also wants to use tariffs to rebalance trade with countries where it has persistent and growing trade deficits in manufactured goods.

The U.S. goods deficit with Mexico hit a record $171.80 billion in 2024. The goods deficit with Canada was not a record breaker, but was $63.33 billion in 2024, up from its pre-Covid 2019 record of $25.76 billion, according to U.S. Census data.

Earlier this week, car manufacturer Honda reportedly announced that it will produce its next-generation Civic hybrid in Indiana, instead of Mexico, to avoid future tariffs risks.

If the White House is focusing on rebalancing the Mexico-Canada trade relationship, meaning fewer imports and more domestic manufacturing, then these tariffs could be here to stay.

The White House has also talked about “reciprocal trade,” suggesting that if the White House receives some trade concessions from Mexico and Canada and gets agreements for more investments in manufacturing in the United States, especially in automotive, then the tariffs may end sooner rather than later.

However, if the Trump administration is not happy with the trade arrangement and does not see more companies investing in domestic manufacturing, next year’s 30-year review of the U.S.-Mexico-Canada Free Trade Agreement could see a radical rewrite.

China Tariffs Doubled

China tariffs were supposed to go up by only 10 percentage points but went up a surprising 20 percentage points instead. The White House cited China’s sale of pre-cursor chemicals used in making fentanyl to the Mexico drug cartels as the reason for the tariff increase.

China was already subject to as much as a 25 percent tariff under the Section 301 tariffs that began in 2018 and were extended another four years in 2024 by the Biden administration.

The China tariffs were broken down into lists. After the first Trump administration reached the so-called Phased One trade agreement, one of those listed items fell to 7.5 percent. But after Tuesday, those items will increase to 27.5 percent.

When Trump first announced these tariffs, he included removing Chinese goods from the so-called de minimis trade provision. This allows for duty-free entry of all goods, including tariffed items, if priced under $800. That order became too cumbersome and has been rescinded for now.

China immediately imposed a 15 percent tariff on U.S. agriculture.

How Steel and Aluminum Tariffs Worked in the Past

Trump first imposed Section 232 steel and aluminum tariffs in 2018. This included Mexican and Canadian steel.

Tariffs were removed and replaced with an agreement not to sell steel goods above 2017 export levels. As those levels were breached, U.S. Senators pressured the Biden administration to raise tariffs in 2024.

Initial 2018 tariffs boosted production, investment, and employment.

But domestic steel production fell from its peak production in 2019 of 87.8 million metric tons to 79.5 million tons in 2024, based on U.S. Department of Commerce figures. Country and product exemptions weakened the tariffs’ effectiveness, resulting in U.S. companies lowering production levels at steel mills as their buyers were now competing with imports from lower cost countries like Brazil and Mexico.

Some local aluminum producers have argued that the initial 10 percent tariff in 2018 was insufficient. The industry reduced from over 20 aluminum producers in 2000 to only four today.

Companies that make goods from aluminum, like manufacturers of piston rods for automotive, successfully convinced the Trump administration that doubling the tariff was needed and new aluminum-derived products had to be added.

New Section 232 tariffs increase next week with new steel and aluminum products added.

Countries that were exempt from Section 232 tariffs in favor of an import quota system will no longer be exempt. This includes the removal of exemptions for Argentina, Australia, Brazil, Canada, Japan, Mexico, South Korea, the European Union, the United Kingdom, and Ukraine.

Under the new Section 232 tariff, steel tariffs will remain at 25 percent, but aluminum tariffs increase from 10 percent to 25 percent on March 12.

Will Tariffs Lead to Higher Inflation?

The first round of China tariffs in 2018 did not lead to any meaningful impact on inflation. Core inflation in 2017 was 1.9 percent, rising to 2.2 percent in 2018 and then 2.3 percent in 2019 after one full year of tariffs.

In March 2023, the U.S. International Trade Commission (ITC) published a 318-page report on the impacts of the Section 232 and Section 301 tariffs.

The ITC report said of the steel and aluminum tariffs that:

U.S. production of steel and aluminum increased by 1.9 percent and 3.6 percent on average, respectively, during this period.
In dollar terms, U.S. production of steel and aluminum was on average $1.5 billion and $1.3 billion higher each year, respectively, than it would have been without the tariffs.
The tariffs are estimated to have increased the average price of steel and aluminum in the United States by 2.4 percent and 1.6 percent, respectively.

The ITC said prices rose slightly under initial China tariffs:

Section 301 tariffs resulted in the value of U.S. imports from China dropping 13 percent on average in the top 10 sectors affected by the tariffs.
Prices rose between 0.2 percent and 0.4 percent on average.

The Boston Federal Reserve estimates that a 25 percent tariff on goods from Canada and Mexico combined with an additional tariff on goods from China could add as much as 0.8 percentage points to core inflation.

It estimated that if China tariffs hit 60 percent and Trump imposes an additional 10 percent tariff on imports globally, inflation could see a one-time increase of 2.2 percentage points before settling down.