US President Donald Trump paused new tariffs on Mexico for one month after Mexico agreed on Monday to reinforce its northern border with 10,000 National Guard members to stem the flow of illegal drugs.
A similar deal was announced between Trump and Canadian Prime Minister Justin Trudeau after a call between the two that went "very well."
The agreement also includes a US commitment to act to prevent trafficking of high-powered weapons to Mexico, Mexican President Claudia Sheinbaum said on X. The two leaders spoke by phone on Monday, just hours before US tariffs on Mexico, China and Canada were set to take effect.
The countries will use the month-long suspension to engage in further negotiations, Trump said on social media.
"I look forward to participating in those negotiations, with President Sheinbaum, as we attempt to achieve a 'deal' between our two Countries," he wrote on Truth Social.
"We have this month to work and convince each other that this is the best way forward," Sheinbaum said at a press conference.
The agreement less than 48 hours after Trump announced sweeping tariffs on goods from the top three US trading partners - accounting for $2.1 trillion of annual commerce - was emblematic of the often chaotic nature of the early days of his second presidency. While the deal eases the pressure for now on Mexico, prospects for a comparable reprieve imminently for Canada and China appeared dim, as Trump and his team kept up their criticism of the US northern neighbor in particular.
US stocks, which had dropped sharply on Monday morning on fears of a deepening trade war, pared their losses following the announcement.
The benchmark S&P 500 was down 0.6% around midday, cutting its losses on the day by more than half. The surprise turn of events also relieved some of the pressure on Mexico's peso.
The tariffs on China remain poised to begin at 00:01 a.m. on Tuesday.
Speaking in Washington on Sunday, Trump suggested the 27-nation European Union would be his next target, but did not say when.
"They don't take our cars, they don't take our farm products. They take almost nothing and we take everything from them," he told reporters.
European Commission president Ursula von der Leyen stated that if the EU was "targeted unfairly or arbitrarily," they would be prepared to fight back, but also called for reason and negotiation.
Chancellor Olaf Scholz of Germany said the bloc could respond if necessary with its own tariffs, but stressed it was better for the two to find agreement on trade.
Trump hinted that Britain, which left the EU in 2020, might be spared tariffs, saying: "I think that one can be worked out."
The US is the EU's largest trade and investment partner. According to the Eurostat data from 2023, the United States had a deficit of 155.8 billion euros ($161.6 billion) with the EU in the trade of goods, offset by a surplus of 104 billion euros in services.
EU foreign policy chief Kaja Kallas said there were no winners in a trade war, and if one broke out between Europe and the United States, "then the one laughing on the side is China."
Markets swoon
Economists say the Republican president's plan to impose 25% tariffs on Canada and Mexico and 10% tariffs on China would slow global growth and drive prices higher for Americans.
The International Chamber of Commerce estimates that the tariffs would lead to a 10% drop in exports from Mexico, slicing 4% from the country's GDP over a year, global policy director Andrew Wilson told Reuters.
Proposed duties on Canada will lead to a 2.6% drop in the country's GDP, he said.
Trump, who acknowledged over the weekend that the tariffs could cause some short-term pain for US consumers, nevertheless has argued the tariffs are needed to curb immigration and narcotics trafficking and spur domestic industries.
Financial market reaction on Monday reflected concerns about the fallout from a trade war. Shares in Tokyo ended the day down almost 3% and Australia's benchmark - often a proxy trade for Chinese markets - dropped 1.8%. The mainland China market was shut for Lunar New Year holidays.
On the day, Germany's DAX index was down 1.5%, France's CAC was down 1.31%, and Britain's FTSE 100 was down 1.15%.
The Chinese yuan, Canadian dollar, and Mexican peso all slumped early on Monday against a soaring dollar. With Canada and Mexico the top sources of US crude oil imports, US oil prices CLc1 jumped more than 1%, while gasoline futures RBc1 rose nearly 3% in early trading.
Trump's tariffs would cover almost half of all US imports and would require the United States to more than double its own manufacturing output to cover the gap - an unfeasible task in the near term, ING analysts wrote.
Other analysts said the tariffs could throw Canada and Mexico into recession and trigger "stagflation" - high inflation, stagnant growth, and elevated unemployment - at home.
In Europe, economists at Deutsche Bank said they were currently factoring in a 0.5% hit to gross domestic product (GDP) should Trump impose 10% tariffs on the bloc.
National Emergency
The White House has not detailed what specific steps Canada or China would need to take to avoid the tariffs.
Trump vowed to keep the sanctions in place until the end of what he described as a national emergency over fentanyl, a deadly opioid, and illegal immigration to the US.
China called fentanyl America's problem and said it would challenge the tariffs at the World Trade Organization and take other countermeasures, but also left the door open for talks.
Canada said it would take legal action under the relevant international bodies to challenge the tariffs.
Automakers would be particularly hard hit, with new tariffs on vehicles built in Canada and Mexico burdening a vast regional supply chain where parts can cross borders several times before final assembly. Ford and General Motors shares fell between 4% and 5% before paring some of their losses following the Mexico announcement.
The world reacts
European leaders were bracing for US tariffs after sweeping levies imposed by US President Donald Trump, affecting billions of dollars in trade between Mexico, China and Canada, roiled global markets and currencies.
Here are some responses to the tariffs out of Europe:
Britain
Britain has a "fair and balanced" trading relationship with the United States that benefited both sides, a government spokesperson said on Monday, after President Donald Trump hinted tariffs could be "worked out" between the two countries.
"The US is an indispensable ally and one of our closest trading partners," the spokesperson said.
Prime Minister Keir Starmer told reporters over the weekend that his early talks with Trump had focused on building on strong trade relations.
Germany
The European Union was strong enough to react to any US tariffs but "the goal should be that things result in cooperation," German Chancellor Olaf Scholz said ahead of an informal EU leaders meeting in Brussels.
Conservative opposition leader and chancellor hopeful Friedrich Merz said that Trump would realize the tariffs he imposes "will not have to be paid by those who import into America. Instead, they will have to be paid for by consumers in America."
Finland
Finland's Prime Minister Petteri Orpo said Europe should negotiate with Trump on trade.
"The most important issue that we all need to understand is that Russia is a threat, a real threat, this is not an opinion this is a fact," he said.
Poland
"It is worth doing everything possible to ensure that in the face of a Russian threat or Chinese expansion, we do not fight between allies," Polish Prime Minister Donald Tusk said.
European Union
EU foreign policy chief Kaja Kallas said if the US and Europe started a trade war "then the one laughing on the side is China."
"We are very interlinked. We need America, and America needs us as well," she said.
France
If Europe is attacked on commercial interests, it will have to make itself respected, French President Emmanuel Macron said ahead of an informal EU defense meeting in Brussels.
Trump's recent statement were pushing "the EU to be more united and more active to respond to issues of collective security," he said.
Spain
The European Union must remain united to respond to Trump's threats to levy tariffs on its products, Spanish Economy Minister Carlos Cuerpo said.
The bloc should protect its companies and make sure they were in a position to compete on equal terms with rivals from other countries, Cuerpo told Spanish radio station RNE.
European central bank policymaker Simkus
ECB policymaker Gediminas Simkus, who is the Lithuanian central bank governor, warned that the tariffs were not good news for the economy or inflation but declined to speculate on the impact.
French central bank governor
Trade tariffs imposed by Trump "will increase economic uncertainty," French central bank governor and ECB policymaker Francois Villeroy de Galhau told France Info, adding they would likely impact the autos sector especially.
Villeroy urged caution on any retaliatory measures, saying it was key to "make our economy stronger."
Luxembourg
The answer to trade tariffs is to respond with the same measures, Luxembourg Prime Minister Luc Frieden said at an informal EU defense retreat in Brussels.
"I think tariffs are always bad. Tariffs are bad for trade. Tariffs are bad for the United States," he said.