Damocles Confirmed

Delia Paredes & Genevieve Signoret

(Hay una versión en español de este artículo aquí.)

In the latest edition of our Quarterly Outlook, we call our base case Damocles. Why the name? Because it assumes that, as in the legend of Damocles, although Trump continues to extend tariff exemptions for imports from Mexico and Canada that are covered by USMCA, both countries (and the rest of the world) will continue to live under a “sword”: the constant threat of tariffs.

Our base case has now been confirmed. The U.S. President has announced a new package of reciprocal tariffs that, with few exceptions, will affect nearly every country in the world. He invoked the powers granted to him under the International Emergency Economic Powers Act, declaring a “trade emergency” on the basis of the $918 billion trade deficit recorded in 2024. For Mexico and Canada, he left in place the exemptions announced in early March. But the sword of Damocles continues to hang over us all.

What do Trump’s measures entail?

1. A baseline 10% tariff on all imports, effective April 5.
2. An additional tariff on each country equivalent to half of the tariff that country imposes on U.S. exports.
3. No specific goals or timeframe.
4. Exemptions to the new measures include:
   • Steel, aluminum, autos, and auto parts: still subject to their existing 25% tariff.
   • Pharmaceuticals, semiconductors, energy, critical minerals.
   • Goods covered under Section 232.
5. A threat: any attempt to “retaliate” against these tariffs—through trade restrictions or other measures—will trigger additional tariffs in response.

Since the announcement, several countries have taken retaliatory measures, which in turn have prompted a response from the U.S. government. As a result, the tariff levels applied to American imports from China now amount to, on average, 124.1%.

In addition, executive orders have been issued in which the White House instructs the Department of Commerce e to investigate various sectors such as pharmaceuticals, semiconductors, critical minerals, and rare earth elements.

And what about Mexico and Canada?

Not all exports to the United States from Canada and the United States are shielded from tariffs.

• 25% tariffs conditioned on fentanyl and migration enforcement remain in place. Exempted are goods covered by USMCA.
• Once the fentanyl and migration emergency has been declared over, non–USMCA-compliant goods will be subject to a 12% tariff.
• Tariffs apply only to the non-U.S. content of a good, provided that at least 20% of the good is of U.S. origin. That is to say, provided that at least 20% of its value can be attributed to components fully or mostly transformed in the United States.
• The U.S. Customs and Border Protection will be responsible for verifying U.S. content.

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