US President Donald Trump declared on Monday that a 25% tariff on imports from Mexico and Canada will take effect on Tuesday, raising fresh concerns about a potential North American trade war, which is already contributing to inflation and slowing economic growth.

"Tomorrow – tariffs of 25% on Canada and 25% on Mexico. And that will commence," Trump stated to reporters in the Roosevelt Room. "They will have to pay a tariff," reports AP.

Trump justified the tariffs as a means to pressure both neighbouring countries into intensifying efforts to combat fentanyl trafficking and curb illegal immigration. However, he has also expressed a broader goal of addressing trade imbalances within the Americas and encouraging more manufacturing operations to relocate to the United States.

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His announcement caused immediate volatility in the U.S. stock market, with the S&P 500 dropping 2% by Monday afternoon. This reaction highlights the economic and political risks Trump is prepared to take, given the likelihood of rising inflation and the potential breakdown of a long-standing trade relationship with Canada and Mexico. The tariffs are scheduled to be enforced at 12:01 a.m. on Tuesday.

Despite this, the Trump administration remains firm in its belief that tariffs will strengthen U.S. manufacturing and attract foreign investment. Commerce Secretary Howard Lutnick pointed to the expansion of the chipmaker TSMC’s investments in the U.S. as an example, attributing it to the possibility of separate 25% tariffs.

In February, Trump had imposed a 10% tariff on Chinese imports, and on Monday, he reiterated that the rate would double to 20% starting Tuesday.

A one-month reprieve was granted in February when both Mexico and Canada pledged concessions, but on Monday, Trump made it clear that there was "no room left for Mexico or Canada" to avoid the sharp tariff hikes. The tariffs will also apply to Canadian energy exports, including oil and electricity, albeit at a lower 10% rate.

Canadian Prime Minister Justin Trudeau condemned Trump’s move, stating, "There is no justification for these tariffs."

"Due to U.S. tariffs, Americans will end up paying more for groceries, petrol, and vehicles while potentially losing thousands of jobs," Trudeau warned. "These tariffs will disrupt a highly successful trade relationship and violate the very agreement President Trump himself negotiated during his previous term."

Trudeau also announced retaliatory measures, stating that Canada will impose a 25% tariff on U.S. goods valued at 155 billion Canadian dollars over the next 21 days, with the first round—worth 30 billion Canadian dollars—set to begin just after midnight on Tuesday.

Mexican President Claudia Sheinbaum had awaited Trump’s final decision on Monday before responding.

"This is a decision that rests with the U.S. government and its president," Sheinbaum said ahead of Trump’s announcement. "Once the decision is made, we will act accordingly, and we have a plan in place. Mexico stands united."

Both Canada and Mexico have taken steps to address Trump’s concerns. Mexico has deployed 10,000 National Guard troops to its border to tackle drug smuggling and illegal migration. Meanwhile, Canada has appointed a fentanyl czar, despite the relatively small scale of fentanyl trafficking from Canada into the U.S.

Until Sunday, there remained uncertainty over Trump’s final decision on tariff rates. Lutnick mentioned on Fox News Channel’s "Sunday Morning Futures" that the situation was still "fluid."

"He’s still weighing his options regarding Mexico and Canada," Lutnick said. "It’s a fluid situation. Tariffs will be implemented on Tuesday for both countries, but the specifics will be left to the president and his team to finalise."

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Treasury Secretary Scott Bessent noted that Mexico had proposed a 20% tax on all Chinese imports as part of its negotiations with the U.S.

In an interview with CBS News on Sunday, Bessent argued that China, rather than U.S. businesses and consumers, would "absorb" the cost of the tariffs, rather than passing them down in the form of price hikes.

However, major corporations such as Ford and Walmart have voiced concerns about the tariffs' negative consequences for their operations. Studies from the Peterson Institute for International Economics and the Yale University Budget Lab estimate that the average American household could face price increases exceeding $1,000.

"This will significantly disrupt businesses, particularly their supply chains and overall efficiency," warned Eswar Prasad, an economist at Cornell University. "The inflationary impact will be considerable and disruptive."

Democrats were swift to criticise the tariff decision, arguing that it would worsen inflation and strain U.S. alliances.

Senate Democratic Leader Chuck Schumer of New York pointed out that inflation was a top concern for voters in last year’s election, remarking, "Now Donald Trump is making it worse."

Senator Amy Klobuchar, D-Minn., warned that fertiliser prices for farmers in her state would increase.

"This is an absurd way to treat our allies," she said. "He’s extending a hand to Russia while simultaneously imposing a 25% tariff on Canadian goods. It makes no sense."

Trump also plans to introduce what he terms "reciprocal" tariffs in April, which will match the rates imposed by other countries, including any subsidies or value-added taxes they charge.

Additionally, he has announced the removal of exemptions from his 2018 tariffs on steel and aluminium, while also expanding tariffs to include autos, computer chips, copper, and pharmaceutical drugs.