Canada, China, Mexico and the art of retaliation

Summary
- The three victims of Donald Trump’s trade war use different playbooks
The confrontation President Donald Trump announced on February 1st targets America’s three largest trading partners. He accuses them of endangering American interests and, starting on February 4th, will subject them to tariffs that are far more harmful than those he imposed in his first term. After decades in which America has supported broadly open markets, his actions look as if they will mark a new era of protectionism.
Canada, China and Mexico all want to buy time, mitigate the damage, retain firepower and create pathways for de-escalation. Yet despite being lumped together and having similar goals, they have different strategies, including fiery rhetoric, targeted counter-tariffs and empty technocratic gestures. How these play out will determine the degree of economic and financial chaos that unfolds and influence how places including Europe respond to Mr Trump if and when he carries out his threat to take action against them too.
Start with Canada, which has sought to appear tough while creating a ratchet effect by imposing its retaliation in two stages. Mr Trump imposed a 25% tariff on Canadian exports to the United States, other than oil, which is subject to a 10% rate. “We didn’t ask for this, but we will not back down in standing up for Canadians," a grim Prime Minister Justin Trudeau said in an address. He appealed to the deep ties that unite the two countries. His headline countermeasures may sound draconian: a reciprocal 25% tariff on C$155bn ($106bn) of American exports to Canada, equivalent to about a third of the value of the goods sent north across the border each year.
Yet the detail is less escalatory. An initial tranche of tariffs on C$30bn targets easy-to-remember products with simple supply chains and geographically concentrated production (citrus fruit, peanut butter, bourbon, motorbikes). The idea is to minimise the pain to Canada and inflict concentrated damage on Americans. But Mr Trudeau has stepped back from immediately putting tariffs on key manufacturing goods, such as cars and trucks, which are part of supply chains criss-crossing the border. To do so might hurt Canada more than America. Instead these and other items will be covered by the second tranche of tariffs, covering C$125bn of goods. That has been delayed for at least 21 days. Mr Trudeau suggested this would help firms find alternative suppliers, but Canadian officials added that they hope the delay will allow a bolt of sanity to break through what they see as madness.
Whereas Mr Trudeau has held open the possibility of non-tariff retaliation he has refrained from using Canada’s most potent weapon: blocking oil exports to America, which amount to 4m barrels a day. The contagion created in the American energy market would be serious, given that Canadian oil flowing via pipelines plays a crucial role in the Midwest and because some refineries employing thousands of American workers are purpose-built to process “heavy" Canadian crude. But an embargo would devastate Canadian producers in Alberta which accounts for 87% of all Canadian oil exports to America—as well as roughly 12% of voters.
Mexico has also been hit with a 25% tariff. After a call with Mr Trudeau, its president, Claudia Sheinbaum, used X to reject Mr Trump’s charge that the Mexican state has an “intolerable alliance" with drug gangs, accusing the United States of having its own pact with gangs to sell them guns, and urging it to sort out its domestic drug problem. She said her government has cracked down on fentanyl trafficking, seizing 20m doses in four months. She said that she had instructed her government to explore a “plan B" of using tariffs to retaliate. Mexican officials suggest these will focus on products that affect Mr Trump’s voters and Republican states, including motorcycles, bourbon, cranberries and oranges. That mirrors Canada’s first-tranche of tariffs and Mexico’s successful tactics in 2018, during Mr Trump’s first term. And as with Canada, it remains to be seen if Mexico is really willing to impose counter-tarrifs on manufacturing supply chains.
Mexico will refrain from a tariff on corn, fearing that livestock would starve on its farms. And while it could seek to retaliate through its financial system, for example by taxing or restricting payments to America, it will be wary of triggering damaging penalties on Mexican banks.
The most restrained response has come from China, which was subject to a new 10% tariff, on top of those already in place. Mr Trump also disqualified Chinese goods from being eligible for the so-called de-minimus exemption of small items from duties, which will hurt Chinese e-commerce firms that export tens of billions of dollars of goods in small packages. So far China’s government has only said it will “take necessary countermeasures" and complain to the World Trade Organisation, a deliberately empty threat. Nonetheless China retains an arsenal of economic weapons to use against America in the event of a full-blown trade war, including export controls and devaluing the yuan, China’s currency.
Despite the differences, the three countries’ responses have common threads. Each country verbally objects, imposes limited immediate retaliatory measures, avoids self-harm and holds more punishment in reserve. What happens next is a game of nerves.
The countries will pray for a backlash in America that creates pressure for Mr Trump to de-escalate. Blowback in Republican states is possible: Florida plays a big role in the orange business, for example, and Harley Davidson’s headquarters are in Wisconsin. While America’s stockmarket is dominated by firms that sell services, not traded goods, the tariffs could unnerve investors who fear higher inflation and lower growth. Given that Mr Trump watches the markets, that could temper his aggression. Tariffs on oil will put upward pressure on fuel prices for drivers. Perhaps anticipating this, Mr Trump posted on February 2nd that “it will all be worth the price that must be paid".
Yet for all that, Canada, Mexico and China will all suffer more than America. Mexico will be worst affected. Some 40% of its GDP comes from exports, of which 80% go to the United States. Estimates suggest the 25% tariff will shrink its economy, which already contracted in the last quarter of 2024, by 2-4% this year. Canada sends 77% of total goods exports southwards while it is the destination for just 18% of exports from the United States. The estimated reduction of Canada’s GDP ranges from 2-3% and up to 2.4m jobs, according to Trevor Toombe, an economist at the University of Calgary.
This could test unity in the three countries. Mexican officials are closing ranks around Ms Sheinbaum, whose approval rating has risen by eight points, to 78%, since she took office in October. But Gabriela Siller of Banco Base, a Mexican bank, criticises the tariffs as the “worst" possible response, because they could lead to a damaging trade war. Mr Trump has reserved the right to impose even higher tariffs if the three countries retaliate to his first round.
In Canada Mr Trudeau will step down as prime minister on March 9th after resigning last month. The ongoing election campaign could spread division. While the conservative opposition condemned America’s tariffs, Mr Trump is likely to view Canada more favourably if it is under right wing rule later this year. Alberta’s premier, Danielle Smith, has courted President Trump, meeting him at Mar-a-Lago and winning an invitation to his inauguration—unlike Mr Trudeau. Even in China the economic slow-down means that dramatic retaliation could produce dissent in elite circles.
One tool has yet to be fully exploited—peace-offerings and tributes to Mr Trump. Ms Sheinbaum repeated once again that Mexico is open to greater co-operation on crime and drugs. She could also step up efforts to screen Chinese investment in Mexico. Europe is reportedly considering purchasing more energy from America. Such deals, aimed at moderating imbalances in bilateral trade with America, could become more common and offer a path out of tit-for-tat tariffs. But the hard truth is that, when a superpower is intent on blowing up the world trading system and bullying its biggest economic partners, there is no easy fix.