Key Takeaways:
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Tariffs: Trump fired the first shot on tariffs, targeting Canada, Mexico, and China. While Canada and Mexico are more likely to compromise, allowing for a potential rollback of tariffs once Trump’s demands are met, tariffs on China are less likely to be swiftly resolved through negotiations given the ongoing tech war.
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AI: The Trump administration has moved swiftly to show strong support for AI development, positioning the government at the forefront of efforts in advancing AI expansion. Meanwhile, the arrival of DeepSeek has set a clear industry direction of making AI models more efficient and cheaper, which is expected to broaden the scope of AI beneficiaries. In the ongoing battle for tech supremacy, the U.S. will likely continue to focus on restricting China’s computing power and containing China’s countermeasures.
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Energy / Immigration: Trump’s policies for expanding oil and gas production and tightening border enforcement align with expectations. U.S. crude oil production capacity is expected to keep rising, serving as a key strategy to mitigate tariff-induced inflation. Meanwhile, immigration restrictions remain focused on border security and are thus expected to have limited impact given the currently balanced labor market.
I. Tariffs: Trump Fires the First Shot, Aiming at Canada, Mexico, and China
Related Executive Orders & Developments:
On February 1, citing threats posed by illegal immigration and influx of drugs (especially fentanyl), Trump signed three executive orders imposing a 10% additional tariff on imports from China and a 25% additional tariff on imports from Canada and Mexico, with the exception of a lower 10% tariff on energy resources from Canada, starting on February 4.
On the same day, both Canada and Mexico announced countermeasures. The Canadian Prime Minister declared a 25% retaliatory tariff on CAD 155 billion worth of U.S. imports, while the Mexican President stated she had directed the Minister of Economy to implement both tariff and non-tariff measures, where, per foreign media sources, the tariff portion may involve a 5~20% retaliatory tariff on U.S. imports. On February 4, China also announced retaliatory measures, focusing on three areas:
Retaliatory tariffs: a 10~15% additional tariff on U.S. energy products (liquified natural gas, crude oil), agricultural machinery, and large-displacement vehicles;
Critical minerals: expanded export controls on rare earth elements, including tungsten, tellurium, bismuth, molybdenum, and indium; and
U.S. companies: launching an antitrust investigation into Google and adding PVH Corp and Illumina to China’s unreliable entity list.
After speaking with the Canadian Prime Minister and Mexican President, Trump signed an executive order on February 3 to postpone the tariffs for 30 days (until March 4). Canada also postponed its counter tariffs by one month subsequently.
In addition to tariffs on Canada, Mexico, and China, Trump also stated that tariffs would soon happen with the EU , and that he intends to impose tariffs on imports of computer chips, pharmaceuticals, steel, aluminum, copper, and oil and gas, potentially as early as mid-February.
The latest round of tariff moves reflects Trump’s “pressure first, negotiate later” strategy. Following discussions with Trump, Canada and Mexico have softened their stance, both expressing willingness to strengthen border security. With that, the immediate tariff threat has been defused, but the tariffs are still set to take effect in a month.
1. Tariff Impact: Greater Impact on Mexico and Canada, Limited Effect on the U.S.
Regarding the impact of tariffs, according to estimates by the Peterson Institute for International Economics (PIIE), in a scenario where the U.S. imposes a 10% tariff on China and a 25% tariff on Canada and Mexico, the projected drag on real GDP growth of the U.S., Canada, Mexico, and China could be up to -0.33%, -1.24%, -1.97%, and -0.21%, respectively, while inflation could be pushed up by up to 0.54, 1.68, 2.27, and 0.17 percentage points, respectively. Based on these projections, Canada and Mexico would face the greatest impact in terms of both economic contraction and inflationary pressures.
The Economist Intelligence Unit (EIU) forecasts that a 10% tariff would reduce China’s GDP by -0.3 percentage points from 2025 to 2027. Meanwhile, we believe that, until the president achieves his broader objectives, tariffs on China are unlikely to remain capped at 10%. Thus, the more neutral scenario may be a total of around 15~20% tariff being imposed during 2025~2027. Under this scenario, EIU estimates the negative impact on China’s GDP could reach -0.6 percentage points.
2. Tariff Duration: Canada and Mexico Likely to Compromise, Raising Chances of Tariff Rollback After Trump’s Goals Are Met
However, the projected impact above assumes that the tariffs will remain in place permanently, so the key question is whether the tariffs will actually persist long enough for their economic impact to materialize. As such, Trump’s true motives warrant closer examination. While reducing the trade deficit has been a central justification for his tariff policies, as the chart below suggests, Canada and Mexico, the two primary targets this time, account for a relatively small share of the U.S. trade deficit when taking into account the total trade volume involved, indicating that addressing the trade deficit may not be Trump’s primary objective this time; rather, there are other underlying goals involved.
Note: The figures in the chart are calculated by dividing the trade deficit by total trade volume (the sum of imports and exports), representing the deficit amount by each unit of trade value with the U.S. For example, while Mexico ranks second in absolute trade deficit, its massive trade volume with the U.S. results in a relatively low ratio in the chart.
In fact, after Canada and Mexico expressed willingness to strengthen border controls, Trump quickly postponed the effective date of the proposed tariffs. The nations entered the negotiation stage earlier than anticipated by many. Meanwhile, Trump has repeatedly made statements urging businesses to move their production to the U.S., including in his speech at the Davos World Economic Forum (WEF) on January 23, where he stated, “Come make your product in America, and we will give you among the lowest taxes of any nation on Earth...But if you don’t make your product in America, which is your prerogative, then, very simply, you will have to pay a tariff.” Given these developments, our take is that addressing illegal immigration and reviving U.S. manufacturing are the true motives of Trump’s tariff threats on Canada and Mexico.
Canada and Mexico’s economic structures also reflect greater dependence on exports compared to the U.S. Therefore, taking countermeasures against the U.S. will hurt their own economies even more. This is more so with the highly intertwined and integrated North American auto industry, where components cross borders multiple times before being assembled into complete vehicles. Imposing tariffs would significantly disrupt the sector, which explains why Mexico sought to exclude the auto industry from the initial stage of its retaliatory measures. Furthermore, Canada and Mexico's exports are highly dependent on the U.S. With a staggering 80% of their exports destined for the U.S., the two nations find themselves in a weak position in the negotiations.
Given these factors, we believe Canada and Mexico are more likely to compromise in the tariff war than China. As long as Trump gets what he wants in future negotiations (addressing immigration and bringing manufacturing back to the U.S.), there is a strong likelihood for tariffs on Canada and Mexico to be dialed back. This underscores a key advantage for the U.S. as a major importer with strong domestic demand.
3. For China, the Tech War Remains the Core Issue
As for the tariffs on China, there is still room for adjustments even as the tariffs take effect. Take the past List 4A and 4B tariffs as an example. Originally scheduled to take effect in 2019, tariffs on List 4A were reduced to 7.5% (from 15%) and tariffs on List B were suspended after the U.S. and China reached the Phase One trade deal in early 2020. Based on historical experience, whether the U.S. and China can reach similar agreements will depend on the extent of concessions from China.
To revisit Trump’s Section 301 investigation against China in 2017, the core accusations included:
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