Tariffs shape global trade, impacting economies and legal frameworks. The U.S. under Trump imposed new tariffs on China, Canada, and Mexico, citing security concerns. This has led to retaliatory measures, raising legal challenges under WTO rules and disrupting commerce.
Introduction
Tariffs are one of the most debated topics in the current global political landscape. While tariffs are primarily a way for the government to protect domestic industries, many fail to understand the nature of ‘imposing tariffs’ and how they actually work. A tariff is essentially a tax imposed on goods and services imported from another country. When a country imposes tariffs on a product imported from another state, the business selling those products does not pay the tax directly. The burden of paying the tax on the product is passed down to the importers, the business and ultimately the customers in the country that has imposed the tariff.
It is a common misconception that tariffs force the importing country to pay more, however, the reality is different. The legal framework of trade is complex and different from other laws. The purpose of tariffs is:
- Response to unfair trade
- Protect and support local industries
- Generate revenue
As the nature of Tariffs by default is international, the World Trade Organisation (WTO) has set universal rules on trade that help facilitate disputes among states. It is imperative to balance this fragile financial structure as using it as a political tool can lead to a trade war which can dismantle the economic stability of both parties and other states as well. Understanding the legal and economic effects of tariffs is essential as these policies impact the people more than the government.
The United States of America has recently changed its tariff policy after President Trump came into office. The Trump administration has been vocal about “reciprocal tariff” since the election campaign. Though reciprocal tariff does not have an official definition, it can be translated to ‘an eye for an eye’. As of February 2025, the Trump administration has imposed an increase in the tariff for China, Mexico and Canada over security concerns. This has created global tension and can lead to constant flux in the economy.
Tariffs Imposed by the United States (2025)
"If India, China, or any other country hits us with a 100 or 200 per cent tariff on American-made goods, we will hit them with the same exact tariff. In other words, 100 per cent is 100 per cent. If they charge us we charge them – an eye for an eye, a tariff for a tariff, same exact amount."[1] – Trump
As promised by Donald Trump during his election campaign, his administration has released executive orders imposing tariffs on Canada, Mexico and China. As allowed under Trade Expansion Act of 1962 (section 232)[2] and International Emergency Economic Powers Act.[3] The executive orders also suspend Section 321 (a) (2) (C) of the Tariff Act of 1930, also known as the ‘de minimis exception’. This section allows tax exemption of import of goods valued at $800 or less, which benefits e-commerce businesses that deliver low value goods to customers.[4]
Goods imported from China face an additional 10% tariff. Trump stated that a balance has to be provided between China and the U.S.A., as they (America) have been subjected to unfair trade practices. The government has the authority to impose and increase trade restrictions when national security is at risk.[5] The Trump administration has failed to provide how national security is at risk, but has used it as a justification publicly at multiple occasions.
Canada and Mexico face 25% additional tariff on imports. Canada is a very close trading partner to the U.S., and has retaliated with reciprocal tariffs on several U.S. goods. Effective 4th February 2025, the Canadian government has imposed 25% tariffs on $30 billion worth of goods imported from the United States. The government has announced that these countermeasures shall remain in effect till the U.S. does not eliminate its tariffs against Canada.[6] Donald Trump on several occasions has made public statements of making Canada the 51st state of the United States of America. These statements have created more tension between the two countries.[7] In a way, it can be seen as a benefit for the local industries in Canada as the citizens are now buying ‘made in Canada’ products than the American ones. In just a couple of days, the Canadian supermarkets have seen replacements of American goods. This may have backfired on the Trump administration.
Mexico has a rough relationship with the U.S. Trump has often accused Mexico of supplying ‘fentanyl’ over the border and illegal immigration.[8] As a response to these accusations, the tariff was increased for Mexico. However, Mexico has responded by targeting U.S. agriculture products and industrial goods specifically.
China went one step forward. The country responded with a combination of increases in tariffs and non-tariff measures. The Chinese government has imposed 15% tax on U.S. coal, gas and other goods, along with impositions on mineral exports and an antitrust investigation into Google. The U.S. can be financially more affected by the Chinese tariff through their restriction on mineral exports. China is a global supplier of rare earth minerals and restricting them will lead to a significant impact as America is dependent on the minerals for defence, electronics and energy industries.
Trade War and its Economic Impacts
The current economic situation can be labelled as a Trade War and can have dire effects on other countries as well. The American economy has both positive and negative effects from the ongoing trade war.
- The increased tariffs could generate approximately $100 billion per year as an extra federal tax revenue.[9]
- The American market can have supply chain disruptions. Businesses can have increased costs, and consumers will face high prices on goods.
- Specific industries like agriculture and certain sectors will face a hike in joblessness.
- The 25% additional tariff on Canada and Mexico will lead to an increase in the cost of production in the American automakers sector. This will cause the cost of some cars to increase by $3000.[10]
- Mexico is the biggest source of fresh produce for America. The cost of groceries could rise.
While the government has retaliated with ‘an eye for an eye’, the impact of these policies will cost the citizens more than Canada or Mexico. Apart from the geographical disadvantage, building trade relations with other countries should not take time if the tariffs remain.
Canadian and Mexican goods will cost more due to the additional tax, which can cause the exports to decline. The same can be said for Chinese goods. China’s economic growth is heavily dependent on exports and their low prices. Disruption in both elements can lead to slower economic growth. Specifically in the machinery, electronics and textiles industry.
Legal Challenges and WTO Rules
The retaliatory measures adopted by the United States have raised several legal issues. Potential violations regarding the rules of the World Trade Organisation are particularly concerning. Members of World Trade have to abide by certain rules set by the organisation to promote free and fair trade.
Potential Challenges
The U.S. tariffs may be challenged on the grounds of violation of WTO’s rules on tariffs and non-discrimination. The World Trade Organisation has a strict “Most Favoured Nation Principle”[11], popularly known as MFN Principle. According to MFN, member countries are required to treat all members equally. Imposing tariffs on specific states, without a justified reason, can violate this principle. The National Security Exception to justify these tariff increases cannot be used as it is narrowly defined and is not clear whether the U.S. fulfills the criteria for this exception.
Retaliatory Tariffs imposed by a state are allowed by WTO, however, the retaliation must be proportionate to the harm caused by unfair trade. To exercise the right to retaliation, evidence of an unfair trade practice has to be established.
The current situation is ongoing and evolving with an uncertain outlook regarding policy implications. There can be several potential scenarios: Escalations, Negotiation or Continued Stalemate.
Conclusion
The trade wars always represent a significant shift in the global landscape. The measures adopted by the United States can have far-reaching consequences for the economy. The long term implications are uncertain, but it is extremely clear that governments and businesses have to adapt to the new reality and not remain dependent on a single country for their economic growth.
Rising prices and inflation can pose a challenge for the Trump administration. Economists have warned that this trade war could lead to higher inflation and may offset any wage gains of the American workers.[12] The agreements and impulsive economic decisions underscore the complexities of international trade and interplay of politics and economics. While the decision of the country’s economy lies in the hands of the government, an advisory role of an economist should be taken into account. Imposing retaliatory tariffs do not address fundamental legal and economic issues and will not provide long-term relief.
Ultimately, modifying tariffs or rescinding them will provide lessons and shape the future of international trade and law governing global commerce. The very fabric of Rules-based trading has to have stability for it to last. While the U.S may have some short-term benefit in terms of federal tax revenue, the long-term effect will dampen investments, distort economic growth and interfere with trade flows. This remains a significant concern as the recipients of all the negative impact will fall on the shoulders of the people. In conclusion, the economic and legal fallout caused due to the trade wars calls for a swift and stable solution to minimise the damage on international commerce and the citizens as well.
[1] Moneycontrol, ‘What Are Reciprocal Tariffs That Trump Is Likely to Implement? How Will India Be Affected?’ (13 February 2025) https://www.moneycontrol.com/news/world/what-are-reciprocal-tariffs-that-trump-is-likely-to-implement-how-will-india-be-affected-12939479.html
[2] U.S. Department of Commerce, ‘Section 232 Investigation on the Effect of Imports of Steel on U.S. National Security’ Commerce.gov https://www.commerce.gov/issues/trade-enforcement/section-232-steel.
[3] U.S. Senate, ‘S. Rept. 110-82 - International Emergency Economic Powers Act’ (110th Congress, 2007-2008) Congress.gov https://www.congress.gov/congressional-report/110th-congress/senate-report/82.
[4] Congressional Research Service, ‘Imports and the Section 321 (De Minimis) Exemption: Origins, Evolution, and Use’ (31 January 2025) https://crsreports.congress.gov/product/pdf/R/R48380
[5] White House, ‘Fact Sheet: President Donald J. Trump Imposes Tariffs on Imports from Canada, Mexico and China’ (1 February 2025) https://www.whitehouse.gov/fact-sheets/2025/02/fact-sheet-president-donald-j-trump-imposes-tariffs-on-imports-from-canada-mexico-and-china/.
[6] Department of Finance Canada, ‘List of Products from the United States Subject to 25 Per Cent Tariffs Effective February 4, 2025’ (February 2025) https://www.canada.ca/en/department-finance/news/2025/02/list-of-products-from-the-united-states-subject-to-25-per-cent-tariffs-effective-february-4-2025.html
[7] Colvin J, ‘Trump Says He’s Serious About Wanting Canada to Become 51st U.S. State’ Time (9 February 2025) https://time.com/7214321/trump-canada-51st-state-fox-super-bowl-interview/.
[8] Dentons, ‘United States Imposes New Tariffs on China Citing National Emergency and Grants a 30-Day Extension to Canada and Mexico’ (4 February 2025) https://www.dentons.com/en/insights/alerts/2025/february/4/united-states-imposes-new-tariffs-on-china-citing-national-emergency.
[9] O'Neil SK and Huesa J, ‘What Trump’s Trade War Would Mean, in Nine Charts’ Council on Foreign Relations (5 February 2025) https://www.cfr.org/article/what-trumps-trade-war-would-mean-nine-charts.
[10] Lorinc J, Welch D and Stillman A, ‘U.S. Car Prices Face $3,000 Increase as Trump Tariffs Hit Auto Sector’ BNN Bloomberg (2 February 2025) https://www.bnnbloomberg.ca/business/2025/02/02/us-car-prices-face-3000-increase-as-trump-tariffs-hit-auto-sector/.
[11] World Trade Organization, ‘Principles of the Trading System’ WTO https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm.
[12] Picchi A, ‘Trump Orders 25% Tariffs on Steel and Aluminum. Here's What Experts Say Could Become Pricier’ CBS News (11 February 2025) https://www.cbsnews.com/news/trump-tariffs-steel-aluminum-25-percent-impact-prices-inflation/.
