On Monday, February 3rd, Canada and Mexico secured a one-month pause on the planned 25% tariff on their exports (10% for Canadian energy), temporarily deescalating trade tensions that spiked after the Trump administration’s announcement on Saturday. Meanwhile, the administration levied 10% additional tariffs on imports from China starting at midnight last night—a move that was greeted with swift retaliatory action from Beijing.
The White House continues to demand cooperation - “full cooperation” in China’s case - from all three nations on border security and fentanyl trafficking to stave off the tariffs. However, the specific concessions required to avoid them permanently remain unclear. As evidenced by Monday's fast-moving developments, negotiations remain extremely in flux, and over the coming month, companies should be prepared for a drawn out, fluid process. Below is the current state of play for each affected nation, as well as congressional reactions and anticipated future actions.
Mexico
President Claudia Sheinbaum and President Donald Trump have agreed to a one-month tariff pause, giving both governments time to assess progress on border security, trade, and migration enforcement. The agreement hinges on three key commitments:
- The Mexican government will deploy a 10,000-strong National Guard (GN) force to the border with the U.S. According to Trump, this force “will be specifically designated to stop the flow of fentanyl and illegal migrants” into the U.S.
- The U.S. has committed to working to tackle flows of firearms to Mexico – a longstanding complaint of successive governments in Mexico.
Both governments will hold further talks on security and migration. Trump announced that these talks would involve Treasury Secretary Scott Bessent, Secretary of State Marco Rubio and Secretary of Commerce nominee Howard Lutnick on the U.S. side.
Mexico’s government now has one month to demonstrate progress on curbing migration and fentanyl trafficking, though the parameters for what constitutes progress on these issues remain unclear. This raises the possibility that the threat of tariffs – with all the uncertainty this entails for business – could be revived, with another possible cliff edge moment as soon as early March. While Monday’s agreement represents a major political win for Sheinbaum and she retains some leverage since she never revealed the content of her “Plan B”, the outlook remains subject to considerable uncertainty.
There was a small discrepancy between Sheinbaum and Trump’s reporting of their conversation; Sheinbaum did not mention that the GN force would be deployed to curb migrants, but only referred to fentanyl interdiction. This omission could reflect Sheinbaum’s domestic concerns over the optics of a militarized deployment against migrants, especially at a time when deportations from the U.S. may be occurring at increased scale.
Canada
Following a conversation with Canadian Prime Minister Justin Trudeau Monday afternoon, President Trump decided to delay the scheduled tariffs for 30 days, “to see whether or not a final Economic deal with Canada can be structured.” Concessions that led to the agreement included:
- Continued implementation of Canada’s CAD $1.1 billion border security package
- Appointing a Fentanyl Czar
- Sending 10,000 personnel to the U.S.-Canada border
- Officially listing drug cartels as terrorist entities
- Ensuring 24/7 monitoring of the border
- Standing up a Canada-U.S. Joint Strike Force
- Creating a new CAD $200 million intelligence directive to combat organized crime and fentanyl trafficking.
In the leadup to the deal, Canadian leaders across the political spectrum demonstrated solidarity and pushed back forcefully against U.S. tariffs, even as negotiations continued behind the scenes. Prior to Trump’s eleventh-hour decision to delay tariffs, Canadian Prime Minister Justin Trudeau had announced $155 billion in retaliatory tariffs, released in two phases. Had the U.S. tariffs gone into effect, he had planned to roll out $30 billion in tariffs on products including orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics, pulp and paper. Twenty-one days later, an additional $125 billion in tariffs would have gone into effect, covering products including cars, trucks, steel and aluminum, fruits and vegetables, aerospace products and meat.
The Canadian tariffs were reportedly tailored to most significantly impact states such as Florida, Kentucky, and South Carolina—states where Trump and Republicans have a strong base of support.
While the delay will allow for negotiations to continue, President Trump has yet to make clear exactly what concessions he needs to see from Canada before taking tariffs off the table. On Monday, he once again doubled down on his desire to see Canada become the 51st state—which would be a nonstarter for Canada.
China
China has announced retaliatory action against the United States, targeting both certain market sectors and individual U.S. companies. On February 10, China will impose 15% tariffs on U.S. LNG and coal and 10% tariffs on crude oil, farm equipment and some U.S.-made cars and trucks. Additionally, they are placing export controls on critical minerals used by the technology industry (including tungsten, tellurium, molybdenum, and others) and are opening an antimonopoly investigation into Google. U.S. clothing manufacturer PVH was also placed on China’s “unreliable entity” list.
In a statement announcing their retaliatory measures, China’s Ministry of Commerce were critical of the additional U.S. tariffs, alleging that they “seriously undermine the rules-based multilateral training system, damage the foundation of economic and trade cooperation between China and the United States, and disrupt the stability of global industry supply chains.” China has also filed a lawsuit against the U.S. at the World Trade Organization (WTO), claiming “the unilateral tariff increase by the United States seriously violates WTO rules.”
China’s carefully calibrated retaliation reflects the leadership’s objective to project strength without encouraging escalation and to leave the door open for negotiations. Compared to the first Trump trade war in 2018-19, Chinese policymakers are relying more on asymmetric retaliation — including export controls and regulatory harassment — rather than limiting themselves to retaliatory tariffs.
Given China’s trade surplus with the U.S., export controls are arguably a more powerful retaliatory weapon than tariffs. Beyond the metals targeted in Beijing’s overnight action, if the trade war escalates, Beijing might target other critical minerals, as well as auto parts and other factory inputs.
The anti-monopoly investigation into Google comes on top of a previous investigation into Nvidia, which Chinese regulators launched in December. From Beijing’s perspective, Google is an attractive target because China does not rely significantly on Google for key technology. Other U.S. national champion technology companies might also become targets if the trade war escalates.
President Trump said Monday afternoon that he expects to speak with President Xi Jinping in the near future, although no specific time has been announced.
Signposts and the threat of more tariffs on the horizon
This week, we have seen some statements of concern from industry groups expressing apprehension about the impacts of tariffs and urging for a quick resolution to the brewing trade war. Monday's market reaction, initial losses followed by a rebound after Trump announced the delay in tariffs on Mexico, are indicative of this dynamic—even as Trump stated that the early selloff did not factor into his negotiations.
Adding to uncertainty, Trump signaled last Friday that he would be levying additional tariffs against the European Union in the coming weeks, potentially as soon as February 18. In response, EU foreign policy chief Kaja Kallas said that the EU is preparing a response and warned that “there are no winners in trade wars.” Trump has also indicated that he would explore broader tariffs on sectors such as semiconductors, steel, aluminum, copper, pharmaceuticals, oil and gas.
Some Democrats are also viewing escalation in trade tensions—as well as other recent administration moves they oppose—as a rationale to take a more antagonistic stance in future legislative battles. Government funding is set to expire in just 38 days, the debt ceiling must be raised this spring, and critical disaster relief for California and North Carolina must be approved. With extremely narrow majorities in both the House and the Senate, Republicans will need Democratic buy-in for must-pass legislation.