Trade Tariffs Imposed by the US on Mexico and China: Impact on Global Supply Chains

The global supply chain landscape is in constant flux, shaped by geopolitical events, economic shifts, and policy changes. One of the most significant developments in recent years has been the imposition of trade tariffs by the United States on imports from Mexico and China. These tariffs, enacted by President Trump in February 2025, have sent shockwaves through international trade, impacting businesses, consumers, and supply chain strategies worldwide. This report delves into the details of these tariffs, explores their implications for global supply chains, sourcing, and logistics, and examines the latest trends, programs, and initiatives aimed at mitigating their impact.

The Latest Trade Tariffs
On February 1, 2025, President Trump signed executive orders imposing new tariffs on goods from Mexico, Canada, and China. These tariffs, enacted under the International Emergency Economic Powers Act (IEEPA), are aimed at addressing concerns related to illegal immigration, drug trafficking, and trade imbalances. Trump claimed that the goal of the tariffs was to stop both illegal immigration to the U.S. and the supply of fentanyl across its borders with Canada and Mexico, and to reduce the U.S.’s trade deficit. He also aimed to incentivize manufacturers to hire Americans to make their products in the United States instead of importing them from other countries. When Trump was previously in office, the administration applied tariffs on steel, aluminum, Chinese imports, and automotive imports. Within a year, other countries enacted numerous retaliatory tariffs on U.S. imports in response.

The key provisions of these tariffs are as follows:
– Mexico: A 25% tariff on all imports from Mexico.
– Canada: A 25% tariff on all imports from Canada, with a 10% tariff on energy products.
– China: A 10% tariff on all imports from China.

These tariffs went into effect on February 4, 2025, and apply to goods entered for consumption in the United States. Goods in transit before February 1, 2025, are exempt from the new tariffs.

Impact on Global Supply Chains
The imposition of these tariffs has had a profound impact on global supply chains, leading to increased costs, disruptions, and a reassessment of sourcing strategies. Some of the key implications include:

• Increased Costs: Tariffs directly increase the cost of imported goods, impacting manufacturers, retailers, and ultimately, consumers. This can lead to price hikes, reduced profit margins, and decreased competitiveness. The tariffs could have far-reaching effects on consumer goods, including those produced domestically, as many products that Americans use daily rely on imported components. A substantial portion of items manufactured in the U.S.—from appliances and industrial goods to pharmaceuticals, cars, and electronics—include imported parts. Some products and organizations will be stressed to the breaking point by the tariffs, and passing on the cost of tariffs through price increases may not be feasible in all scenarios. In some cases, enterprises may be forced to retire a product due to the tariffs. The tariffs could spark higher prices and supply-chain disruptions for Americans.
• Supply Chain Disruptions: Tariffs can disrupt established supply chains, forcing companies to seek alternative suppliers or adjust production processes. This can lead to delays, shortages, and increased complexity in managing logistics. The tariffs could also erode economic growth and improvements in supply-chain security that were direct results of the USMCA. The tariffs have the potential to be counterproductive to Trump’s goal of curbing immigration. The tariffs could also mean that US trade treaties now come with a caveat. US-China decoupling in bilateral trade is real, but supply chains remain intertwined with China. China’s share of US imports fell from 22% to 16% between 2017 and 2022 due to US tariffs. US imports from China are being replaced with imports from large developing countries with revealed comparative advantage in a product. The tariffs reduced import growth from China and stimulated import growth from other countries. However, the reshaping of US imports away from China may not have reduced dependence on China as much as bilateral import numbers suggest, as countries that were more deeply engaged in Chinese supply chains experienced the most rapid export growth to the US. The tariffs also reduced US export growth, lowered employment, and had a negative effect on aggregate real income in both the US and China. The tariffs could also have a ripple effect throughout the entire supply chain ecosystem.
• Shift in Sourcing Strategies: Companies are increasingly diversifying their supply chains to reduce reliance on tariff-affected regions. This includes exploring nearshoring, reshoring, and sourcing from countries not subject to tariffs.
• Logistics and Transportation Challenges: Cross-border trade with Mexico and Canada has been impacted, with potential for customs bottlenecks and delays. Shippers may need to reconfigure supply routes, impacting trucking, rail, and port operations.
• Retaliatory Tariffs: Canada has already announced retaliatory tariffs on $155 billion worth of U.S. goods, and Mexico is expected to follow suit. Some of the key products targeted by retaliatory tariffs include U.S. soybeans, pork, whiskey, and automobiles. Exports to China, the largest buyer of U.S. soybeans, dropped by nearly 75% in 2018 due to retaliatory tariffs, and export volumes of some machinery products and vehicles dropped by 10%-20%. China placed tariffs on tens of billions of dollars worth of U.S. exports in response to Trump’s previous tariffs. The European Union and Canada responded to steel and aluminum tariffs by imposing tariffs of their own. Mexico has been preparing possible retaliatory tariffs on imports from the US, ranging from 5% to 20%, on pork, cheese, fresh produce, manufactured steel, and aluminum. This could further escalate trade tensions and disrupt global markets. Retaliatory tariffs can impact US exporters in the pulp and paper, and metals industries. Mexico may also impose retaliatory tariffs on US goods, including pork from Iowa, dairy from Wisconsin, and industrial goods, including vehicles and electronics, particularly from Michigan and Ohio.

In addition to the above, the tariffs have the potential to:

• Impact Inflation: Inflation in the U.S. could rise by as much as 1 percentage point, pushing it as high as 4% on an annual basis, or double the Federal Reserve’s goal for a 2% annual rate.
• Impact the USMCA Trade Agreement: Both Canada and Mexico have said that Trump’s tariffs violate the United States–Mexico–Canada free trade agreement.
• Create a Stagflationary Shock: Steep tariff increases against U.S. trading partners could create a stagflationary shock—a negative economic hit combined with an inflationary impulse—while also triggering financial market volatility.
• Impact Consumer and Business Behavior: The mere prospect of tariffs appears to be influencing the behavior of consumers and businesses. Some consumers may have purchased goods before the tariffs were implemented in anticipation of tariff-related price hikes. Companies were advancing deliveries of products coming from overseas that will likely see tariffs.
• Impact US Jobs: The tariffs could lead to job losses in the “industrial heartland” as American producers can’t compete due to higher input costs. The tariffs could also hurt jobs in the distilled spirits industry.
• Impact US Foreign Relations: The tariffs could cause a loss of trust in the US by Canada and Mexico. The tariffs could also be a “strategic gift” for China. The tariffs could help Beijing weaken US ties to allies.

Impact on Specific Industries and Companies
The impact of these tariffs varies across industries and companies. Some sectors are particularly vulnerable due to their reliance on imports from Mexico and China.

• Automotive Industry: The automotive industry is heavily integrated across North America, with significant cross-border trade in parts and finished vehicles. Tariffs on imports from Mexico and Canada could lead to higher production costs and potential disruptions in the supply of critical components. For example, Ford relies on engines from Canada for its F-series pickup trucks, and many other automakers have significant manufacturing operations in Mexico. China is also a major supplier of auto parts to the U.S. Automobiles could see an average price increase of $3,000 each due to the tariffs, and the tariffs could add $3,000 to the cost of an average automobile, leading to a drop in overall sales of one million units this year.
• Energy Sector: Tariffs on Canadian energy products could impact U.S. refineries that rely on Canadian crude oil. This could lead to higher energy costs for consumers and businesses, and American consumers will end up paying more for energy. The tariffs could also upend energy sector business models.
• Agriculture: U.S. consumers could see higher prices for produce and agricultural products imported from Canada and Mexico, such as avocados, strawberries, and beef. 50% of all avocados, tomatoes, chili peppers, and berries consumed in the US come from Mexico, and the country also exports more than $1.5 billion in beef and pork to the US. Grocery stores operate on tiny margins and can’t absorb the tariffs, so these costs will likely be passed on to consumers. About one-third of softwood lumber used in the U.S. is imported from Canada each year, and tacking a 25% tariff on Canadian lumber could cause a “supply shock”.
• Consumer Goods: Tariffs on Chinese imports could impact a wide range of consumer goods, including electronics, clothing, and toys. Cell phones, computers, and other electronic devices were among the top imports from China last year. The U.S. also imported more than $32 billion in “toys, games and sporting goods” from China last year. Americans import billions of dollars a year in clothing from China, including more than $7.9 billion in footwear last year. Key smartphone components such as processors, displays, and batteries are often sourced from countries like China, South Korea, and Taiwan.
• Other Industries: The tariffs could also impact a wide range of other industries, including:

• Distilled Spirits: The tariffs could hurt jobs in the distilled spirits industry. Since the 1990s, trade in spirits in North America has been largely tariff-free, resulting in significant growth. U.S.-Canada trade in spirits increased by 147%, while U.S.-Mexico trade surged by 4,080%. Bourbon and Tennessee whiskey can only be made in the U.S., tequila in Mexico, and Canadian whiskey in Canada.
• Pulp and Paper: Retaliatory tariffs can impact US exporters in the pulp and paper industry.
• Metals: Retaliatory tariffs can impact US exporters in the metals industry.
• Chemicals: Chemical companies may benefit from reshoring due to the tariffs.
• Travel Goods: The tariffs could impact the cost of travel goods, with prices potentially increasing between 13% and 21.5%. Imports from China could decrease between 74% and 87.3%, and total imports from all sources could decrease by up to 34.8%.
• Furniture: The tariffs could decrease imports from China up to 87%, with a decrease from all sources between 28% and 39.7%. Furniture prices could increase between 6.4% and 9.5%.
• Household Appliances: Appliance prices could increase between 19.4% and 31%. Imports from China could decrease between 77.5% and 89.8%, with a potential decrease from all sources between 29.6% and 41.7%.
• Toys: Increases in toy prices could range between 36.3% to 55.8%. Decreases in toy imports across all sources could range from 52% to 64.9%, and imports from China could decrease by up to 85.6%.
• Apparel: The tariffs could decrease imports of apparel and accessories from China.

Real-Life Examples of Adaptation

Companies are adapting to the new tariff landscape by adjusting their supply chain strategies and sourcing practices. Here are a few examples:

• The Penny Ice Creamery: This California-based ice cream parlor is facing higher costs for imported supplies, including refrigerators from China and sprinkles from Canada. They have already had to raise prices due to inflation, and the new tariffs are adding to their challenges.
• Aeroflow Health: This North Carolina-based medical supply company sources more than half of its supplies, including breast pumps, from China. The tariffs are impacting their costs and forcing them to consider sourcing cheaper products or passing on higher costs to consumers through increased health insurance premiums.
• skinnytees: This Michigan-based women’s apparel company imports clothing from China. The 10% tariff is increasing their costs, but they plan to absorb the extra expense rather than passing it on to customers.
• Adidas: This footwear company aims to halt the procurement of US goods from China and plans to localize production in certain geographies to increase supply chain agility.

Latest Trends, Programs, and Initiatives

In response to the challenges posed by tariffs, several trends and initiatives have emerged in global supply chain management:

• Nearshoring and Reshoring: Companies are increasingly moving production closer to their end markets to reduce reliance on long, complex supply chains and mitigate tariff risks. This includes relocating manufacturing to the U.S. or to nearby countries like Mexico.
• Supply Chain Diversification: Businesses are diversifying their supplier base to reduce dependence on any single country or region. This involves sourcing from multiple countries and exploring new markets.
• Tariff Engineering: Companies are exploring ways to redesign products or reclassify them to minimize tariff obligations. This involves working with experts to understand tariff codes and identify opportunities for cost savings.
• Leveraging Free Trade Agreements: Companies are utilizing existing free trade agreements to access preferential tariff rates and reduce costs. For example, the United States-Mexico-Canada Agreement (USMCA) provides duty-free access for many goods traded between these countries. The USMCA is due for review in July 2026 and may be revisited in whole or in targeted parts, which could have a significant impact on U.S. companies’ supply chains.
• Foreign Trade Zones (FTZs): FTZs are secure areas within the U.S. where goods can be imported, stored, and processed without being subject to customs duties until they enter the domestic market. This allows businesses to defer or reduce tariff costs.
• Duty Drawback Programs: These programs allow businesses to claim refunds on duties paid for goods that are later exported or used in the production of exported goods. This can help businesses reduce the financial burden of tariffs.
• Trade Deficit Shifts: Trade deficit shifts may be a key factor in how tariffs are imposed to prevent companies from bypassing tariffs as they move production or sourcing from one geographic location to another. While the trade deficit with China has decreased, it has increased with Vietnam and Mexico.
• Revoking the De Minimis Exemption: The Trade Act Section 321 (de minimis exemption) benefit for China-origin goods is under consideration by the current U.S. Congress and could pass with bipartisan support.
• Increased Freight Rates: In the short term, expect both international and domestic freight rates to spike as import volumes increase as companies forward stock inventories. Spikes in import volume may ultimately be short-lived, however. Higher tariffs discourage imports and slow shipping volumes over time. Once tariffs are implemented, importing goods to the US will increase costs. A sudden increase in demand on major trade lanes into the U.S. when ocean supply chains are already under pressure due to disruption in the Red Sea will place upward pressure on freight rates. The potential for freight rates to spike as retailers rush to buy safety stock ahead of potential tariff implementations also exists. In the longer term, broad tariffs could discourage imports, potentially slowing freight volumes at ports and driving down rates.
• Increased Warehousing and Shipping Costs: Many companies hope to reduce tariff exposure in the short-term by creating inventory stockpiles. If stockpiled inventory volumes increase significantly, that may subsequently increase warehousing and shipping costs. Some supply chain leaders may seek to optimize and expand warehouse footprints and carrier partnerships to support larger inventories.
• Compliance and Labeling Challenges: 70% of companies with $1 billion+ in revenue report being forced to re-label inbound goods due to compliance issues, leading to high costs. 77% agree that controlled access to labeling networks could resolve labeling errors and streamline inbound goods handling.
• Sustainability: 55% of G2000 companies have reduced their operational emissions since 2016, 77% have reduced emissions intensity, and 30% are deploying 15 or more decarbonization levers. 64% of European companies have full Scope 1-3 targets, compared to only 26% of North American companies.
• Healthcare Supply Chains: Leading health systems demonstrate a focus on enhancing service delivery in clinical areas. Leading health systems are addressing the gap in unmanaged spend by broadening the influence of the supply chain through greater organizational collaboration.
• Logistics Real Estate Market: After a sluggish first half, Q3 2024 leasing improved. Tenant activity is expected to pick up in the coming quarters post-election. TEU volumes are up 14.8% year-to-date as shippers pulled freight forward ahead of the ILA strike. Logistics providers are leasing large spaces in port markets, fueled by tariff concerns and e-commerce growth. The construction pipeline is down 56% from its 2022 peak. California’s AB-98 bill will limit supply in key markets like the Inland Empire. A large mark-to-market looms on leases signed in recent years, thanks to 70% rent growth in the past five years. Some 2023 leases may now be above market.
• Product Innovation: Tariffs could be the trigger needed to create “renovations” or adjustments to products. Tariffs provide an opportunity to review the viability of a product and where/whether it fits within the enterprise’s portfolio. Tariffs will offer the opportunity to invest in new projects or products, in new markets, or to repurpose current facilities for new uses. Enterprises looking to reinvent should carefully consider when to implement such a move and whether the potential for policy escalation or de-escalation would necessitate a different approach.

Government Programs Aimed at Mitigating the Impact of Tariffs

The U.S. government has implemented several programs and initiatives to help businesses navigate the challenges posed by tariffs:

• Free Trade Agreements (FTAs): The U.S. has FTAs with 20 countries, providing preferential tariff treatment and reducing trade barriers for U.S. businesses. These agreements cover a wide range of sectors, including agriculture, manufacturing, and services.
• Foreign Trade Zones (FTZs): FTZs are secure areas within the U.S. where goods can be imported, stored, and processed without being subject to customs duties until they enter the domestic market. This allows businesses to defer or reduce tariff costs.
• Duty Drawback Programs: These programs provide refunds of duties paid on imported goods that are later exported or used in the production of exported goods. This can help businesses reduce the financial burden of tariffs.
• Trade Adjustment Assistance (TAA): TAA provides support to workers who have lost their jobs or whose hours have been reduced due to increased imports. This includes job training, income support, and relocation assistance.
• Market Facilitation Program (MFP): This program provides direct payments to farmers and ranchers who have been impacted by retaliatory tariffs imposed by other countries in response to U.S. tariffs.

The trade tariffs imposed by the United States on Mexico and China have created a complex and dynamic environment for global supply chains. Businesses are adapting by diversifying their sourcing, exploring nearshoring and reshoring options, and leveraging government programs and initiatives to mitigate the impact of tariffs. The long-term consequences of these tariffs remain uncertain, but they have undoubtedly accelerated the evolution of global supply chain strategies and highlighted the importance of resilience, agility, and adaptability in navigating the challenges of international trade.