Newly elected U.S. President Donald Trump edged closer to keeping one of the biggest items on his campaign manifesto: slapping a 25% tariff on goods imported from either Canada or Mexico and a 10% tariff on all Chinese imports. The ruling is said to take effect from February 1, just two weeks since Trump reported back to the White House. Those tariffs targeted America’s largest trading partners, as Canada and Mexico collectively bought $808 billion worth of U.S. goods and services in 2023, according to the U.S. Department of Commerce. But a U.S. trade deficit with those nations—$40 billion with Canada and $162 billion with Mexico—has driven Trump’s push for tariffs as a tool to deal with what he calls “unfair” trade practices.
Economists warn that tariffs will raise prices for American consumers, but Trump sees them as a means of trimming the trade deficit, stimulating domestic manufacturing, and bringing in revenue for the government. He also seems to regard the tariffs as bargaining chips in other negotiations, such as immigration control and the war on drugs. While Trump has, so far, held off from slapping tariffs on all imports, his targeting of Canada and Mexico represents a stark shift in the North American dynamics of trade. The tariffs he has threatened to impose will upset supply chains and raise businesses’ costs amid already strained diplomatic relations.
Canada and Mexico: Navigating political and economic uncertainty
For Canada, the tariffs come at an especially perilous moment of political flux. Prime Minister Justin Trudeau recently ceded the leadership of the Liberal Party and possibly faces a no-confidence vote shortly that may result in the Conservative Party assuming office. Meanwhile, the internal turmoil dampens Canada’s ability to respond effectively. But again, comments by Trump about Canada, even to the extent of suggesting that it might become the 51st state of the U.S., did little to ease relations. With domestic challenges in Canada, countering the economic effects of tariffs-which could shrink GDP by 4.1%, according to Julian Hinz of the Kiel Institute for the World Economy-may be difficult.
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But it is equally, if not more, vulnerable; the country enforces very intensive economic relations with the U.S. Almost 80% of all food and manufactures produced by Mexico go to that market. Now, President Claudia Sheinbaum takes a critical but cautious course in trying not to stir antagonism and points to the need for sticking strictly to existing accords like the USMCA-United States Mexico-Canada Agreement. But Trump has called the USMCA “the worst trade deal ever” and wants to renegotiate. Mexican officials have drawn up contingency plans, including possible retaliatory tariffs against U.S. goods and deeper economic ties with China, America’s geopolitical foe. All the same, a 25% tariff might prove “catastrophic” for Mexico, slicing as much as 2% off its GDP growth rate.
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The broader impact on North America
A closely integrated supply chain runs across the continent-one that threatened tariffs would substantially disrupt. The auto and manufacturing industries rely on cross-border production processes made unaffordably expensive by the imposition of new tariffs. For example, Elon Musk’s planned Tesla factory in Nuevo Leon, Mexico, is reportedly on hold given uncertainty over US trade policy. Equally, Chinese firms that had invested in production facilities in Mexico to get around US tariffs on goods coming from China are likely now second-guessing their bets.
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The economic impact of Trump’s tariffs does not stop at Canada and Mexico. The U.S. might lose $200 billion in GDP over Trump’s second term, while Canada and Mexico face $100 billion in losses and significant growth reductions, respectively, according to the Peterson Institute for International Economics. The tariffs also risk pushing up prices for American consumers and causing dislocation in industries reliant on North American trade.
And with the deadline of February 1, the questions mount: Will US courts block the tariffs? How will Canada and Mexico respond with their own trade actions? How will companies adjust to this new reality? Politically expedient as a stopgap measure, the possible long-term economic and diplomatic fallouts could hurt all parties. Eventually, these policy uncertainties are a barrier to growth in and of themselves, with complications both for businesses and governments across North America.
