Newly elected U.S. President Donald Trump moved closer to his campaign promise on trade, proposing a 25% tariff on goods imported from Canada and Mexico and an additional 10% on those from China starting February 1. America’s biggest trading partners are affected by this ruling. In 2023, Canada and Mexico bought $808 billion worth of U.S. goods and services, according to the U.S. Department of Commerce. But the larger U.S. trade deficit with those countries—$40 billion with Canada and $162 billion with Mexico—drove Trump’s efforts to threaten tariffs to pressure “unfair” trading practices.
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Economists predict tariffs could increase costs for American consumers, but Trump said tariffs would lower the trade deficit, increase American manufacturing, and bring in revenue to the government. He further views tariffs as a means to strengthen border security and control immigration. While Trump has not imposed universal tariffs on all imports, the attention to Canada and Mexico means a large shift in the dynamics of North American trade. The proposed tariffs could disrupt supply chains, increase costs for businesses, and strain diplomatic relations.
Canada and Mexico: Preparing for economic and political challenges
For Canada, the proposed tariffs come at a time of political uncertainty. Prime Minister Justin Trudeau, who recently stepped down as leader of the Liberal Party, faces a potential vote of no confidence or a new election, which could bring the Conservatives to power. This internal turmoil makes it difficult for Canada to respond effectively to U.S. trade policies. Trump’s dismissive remarks about Canada, including suggestions that it could become the 51st U.S. state, have further strained relations. As Canada grapples with domestic challenges, it may struggle to counter the economic impact of tariffs, which could lead to a 4.1% drop in GDP, according to Julian Hinz of the Kiel Institute for the World Economy.
Mexico, meanwhile, faces even greater vulnerability due to its deep economic ties with the U.S. Around 80% of Mexican exports, including food and manufactured goods, are destined for the U.S. market. President Claudia Sheinbaum has taken a firm but measured approach, emphasizing the importance of adhering to existing trade agreements like the United States-Mexico-Canada Agreement (USMCA). However, Trump has criticized the USMCA as “the worst trade deal ever” and seeks to renegotiate it. Mexican officials have prepared contingency plans, including potential counter-tariffs on U.S. products and increased economic cooperation with China, America’s geopolitical rival. Despite these efforts, a 25% tariff could be “catastrophic” for Mexico, potentially reducing its GDP growth rate by 2%.
The broader impact on North America
For Canada, though, the announced tariffs come out at a really bad time as the country battles political uncertainty as well. Specifically, Prime Minister Justin Trudeau led the Liberal Party until recently into a possible no-confidence vote that could usher the Conservatives into government. This means that internal fighting makes it nearly impossible for effective responses to keep up with Trump’s trade position. Trump’s dismissive comments about Canada, including a joke that it could become the 51st U.S. state, have only heightened tensions. Canada is already facing some domestic challenges and thus is ill-equipped to respond effectively to the economic effects of tariffs, which could depress its GDP by 4.1%, says Julian Hinz from the Kiel Institute for the World Economy.
However, Mexico is even more vulnerable because of its strong economic ties with the U.S.; up to 80% of Mexican exports include food and manufactured goods sold in the United States. Claudia Sheinbaum, President of Mexico City, appeared firm but measured, underscoring the respect for new conditions, including the ones from the USMCA agreement. However, Trump called the USMCA “the worst trade deal ever” and tried to renegotiate it. Mexican officials have drafted contingency plans, including possible retaliatory tariffs against U.S. products and deeper economic cooperation with China, America’s geopolitical rival. Yet even with these measures in place, a 25% tariff may prove “catastrophic” for Mexico and shave 2% off its GDP growth rate.
