Trump tariffs usher in new era of protectionism

The U.S. economy entered a new era at 12:01 a.m. Tuesday, as President Trump’s tariffs on imports from Mexico and Canada took effect. The new tariffs on imported goods ended decades of free trade among the three countries, and stood to disrupt entire industries.

The 25% tariffs will be levied on imports from Mexico and Canada, with the exception of energy products such as crude oil and natural gas, which will be tariffed at 10%. Canada said it would impose retaliatory tariffs.

If the tariffs remain in place, they have the potential to profoundly reshape relations between the U.S. and two of its biggest trading partners, abruptly reversing America’s decadeslong project of expanding free trade with its allies. The three countries had been operating under a revised free-trade agreement Trump brokered during his first term.

Beyond tariffs on Mexico and Canada, Trump on Monday signed an executive order imposing an additional 10% tariff on China, on top of the 10% tariff that went into effect last month. That change was also effective on Tuesday, just after midnight.

The Trump administration has cited the flow of drugs and undocumented immigrants across the U.S. border as justification for tariffs. Trump also has said that tariffs would lead to more manufacturing in the U.S. ​​“So they’re going to have a tariff, and what they have to do is build their car plants, frankly, and other things, in the United States, in which case you have no tariffs,” he said Monday.

What impacts are tariffs having so far?

Uncertainty is already affecting the economy by slowing business orders and making it harder for companies to plan. This comes as the economy is hit by other forces, including mass layoffs of federal workers, cutbacks to government-funded programs and restrictions on immigration. U.S. stocks tumbled Monday after Trump confirmed tariffs were coming, led by a 2.6% decline in the technology-heavy Nasdaq Composite.

Manufacturers are feeling the pinch. “Tariff threats and uncertainty are extremely disruptive,” noted one respondent to the Dallas Fed’s February manufacturing survey, released last week. “This is a time of uncertainty for manufacturers, very difficult to make business plans,” another respondent said in the Kansas City Fed’s February manufacturing survey, also released last week.

Monday’s report on February manufacturing from the Institute for Supply Management included 20 mentions of tariffs in the press release, compared with four in January, Goldman Sachs noted. Among the comments included in that report: “Customers are pausing on new orders as a result of uncertainty regarding tariffs. There is no clear direction from the administration on how they will be implemented, so it’s harder to project how they will affect business.” The Institute’s purchasing managers index fell slightly in February, indicating a slowdown in manufacturing growth.

What are companies saying?

The auto industry, with supply chains stretching across all three countries, is particularly at risk. On Ford Motor’s earnings call last month, chief executive Jim Farley warned that protracted 25% tariffs against Canada and Mexico “would have a huge impact on our industry with billions of dollars of industry profits wiped out.”

Some companies are bracing for higher prices on food imports.

It is challenging for some small businesses to prepare. The Penny Ice Creamery, based in Santa Cruz, Calif., doesn’t have a lot of extra space to stockpile the specialty sprinkles it imports from Canada. Budgets are also tight coming out of the slower winter months, co-owner Zachary Davis said.

Some companies are planning to shoulder costs, at least for now.

Chipotle Mexican Grill, for example, said it expects tariffs imposed on Mexican imports like avocados could weigh on its profit margins this year. The company on Monday said it aims to absorb potential cost increases, rather than raising customer prices, due to uncertainty about how long the tariffs could last.

How could tariffs affect the economy longer term?

Economists warn that tariffs have the potential to raise prices while also slowing the economy, increasing the risk of “stagflation,” a combination of anemic growth and high inflation.

If tariffs remain in effect, they may push up inflation in March, April and May as firms raise prices to make up for higher import costs, said Michael Feroli, chief U.S. economist at JPMorgan Chase. The tariffs also may hurt U.S. exporters if Canada and Mexico’s economies take a hit and if they retaliate with tariffs of their own. “If those countries go into recession, that alone is a reason to expect U.S. exports to those countries to slow,” he said.

Is there modern precedent for these tariffs?

The U.S. has raised tariffs on major trading partners in the past, but increases tended to be gradual, said Douglas Irwin, a Dartmouth College economist who wrote the book “Clashing over Commerce: A History of U.S. Trade Policy.” Substantial tariff hikes such as the Smoot-Hawley tariffs of 1930 affected a smaller part of the U.S. economy because some goods were exempt and because the country was less trade-dependent then, Irwin said.

In 1807, Congress implemented a virtually universal embargo on foreign trade in response to interceptions of U.S. ships by British forces during the Napoleonic Wars. “It was enormously destructive to the U.S. economy,” Irwin said.

Write to Konrad Putzier at konrad.putzier@wsj.com and Justin Lahart at Justin.Lahart@wsj.com