There are still more than 50 days left until Donald Trump takes office, but he has already laid the ground for a trade war that could shake the global economy.

Trump announced on Monday that he will sign an executive order placing a 25% tariff on all imports from Canada and Mexico, along with an additional 10% tariff on imports from China, in purported retaliation for drugs and migrants crossing US borders.

Though the president-elect promised to issue universal tariffs on the campaign trail – hitting all goods imported into the US from overseas – these are specifically targeted at the US’s three largest trading partners. Trump said he will sign the executive order on 20 January, his first day in office.

Here’s what to know about tariffs, and how Trump’s plan to enforce them could unfold.

What is a tariff?

A tariff is a tax on imports, or foreign goods brought into the United States.

Who pays for tariffs?

This is a question that many Americans asked after the election. Trump has said foreign countries pay for tariffs, but tariffs are actually paid by American companies that import goods from abroad.

So if an American car manufacturer is importing a part from Mexico, it will have to pay a tariff on the part once it arrives in the country.

What does the US import from Canada, Mexico and China?

US companies imported over $1.2tn from Canada, Mexico and China in 2023. The three countries are the US’s largest trade partners. A tariff on all three countries is essentially a tax on those imports.

Canada is a major exporter of crude oil and other gas products to the US. Mexico has become a major car and auto parts exporter in recent years (Tesla announced last year a plan to build a factory in the country, though it has since halted the project while Elon Musk was supporting Trump’s campaign.) China is a major exporter of electronics, like phones and laptops.

Does Trump need congressional approval to pass tariffs?

Republicans have a majority in the House and Senate, which means Trump has a lot of power in Congress to pass legislation.

But the president also has the power to enact tariffs without congressional approval when it relates to national security, protecting American industries or in the case of a “national emergency” – very broad reasons that will make a legal case against the tariffs tough to fight in court.

Why is Trump levying tariffs?

The US imports more goods than its exports – the trade deficit. Not all economists agree that trade deficits are bad but Trump has railed against them for years and tariffs are his preferred tool to deal with them.

Tariffs became a big deal in 2018 during Trump’s first term when he levied tariffs on some products from China and on metal imports. He also threatened to put tariffs on imports from Mexico, in retaliation for the large number of migrants who were crossing the border at the time. Trump eventually backed down from the tariffs in 2020.

In other words, this is all a bit deja vu.

The way that tariffs work, in Trump’s mind, is that high tariffs will incentivize American companies to move their manufacturing from abroad to American shores.

“All you have to do is build your plant in the United States, and you don’t have tariffs,” Trump said just a few weeks before the election.

But getting out of the complex global manufacturing ecosystems is nearly impossible for many companies. It takes years to get a factory up and running, so even if a company theoretically wanted to bolster its domestic manufacturing to avoid tariffs, Trump’s term would likely be over by the time it was ready.

Do tariffs impact consumers?

Consumers will almost surely feel the impact through price increases.

Trump campaigned on implementing 10% to 20% tariffs across the board, with 60% tariffs on imports from China. Economists have calculated that such tariffs could add between $1,900 to $7,600 to household costs, a 1.4% to 5.1% increase in inflation. That’s because companies would simply pass on the tariff costs to consumers. Executives from multiple American companies, including Walmart, Columbia Sportswear and AutoZone have all said that they would ultimately have to increase their prices with tariffs.

American consumers seem to be aware of this dynamic. In a recent Harris/Guardian poll, nearly two-thirds of Americans said they expect prices to go up if Trump implements broad tariffs.

How will other countries respond to American tariffs?

Not kindly. Countries whose exporters are subject to tariffs can slap tariffs on American imports in retaliation.

After Trump put tariffs on Chinese imports, China put tariffs on American imports, including soybeans and corn. The move ultimately hurt American farmers, who relied on business with China. Trump, without the approval of Congress, ended up bailing out farmers who saw at least $10bn in export revenue drop after the tariffs. The Council on Foreign Relations, an American thinktank, has since calculated that as much as 92% of the proceeds that the US collected from its tariffs on Chinese imports were ultimately spent on payouts to farmers.

Since Trump’s latest tariff announcement, China’s embassy has ominously responded by saying: “No one will win a trade war.” Mexico’s economy minister Marcelo Ebrard meanwhile said, before the election, that the country would consider retaliating.

“If you put 25% tariffs on me, I have to react with tariffs,” he said. “Structurally, we have the conditions to play in Mexico’s favor.”